How to Borrow on Aave: Collateral, LTV, and Liquidation Risk
If you’ve already tried lending on Aave (Post 39), you’ve seen how your deposited crypto starts earning interest automatically. That’s the first half of what Aave does. The second half — borrowing against your crypto — is where things get more interesting, and where beginners need to slow down and pay attention.
This post walks you through how DeFi borrowing works, why people use it, and the one number you must watch every day you have an open loan.
Why Would You Borrow Against Crypto You Already Own?
This question stops most people. If you own $1,000 worth of ETH, why borrow instead of just selling it?
Three reasons:
You avoid a taxable event. In most countries, selling crypto triggers a capital gains tax. Borrowing against it does not. If you need $500 to cover an expense but you believe ETH is going higher, borrowing lets you get that cash without selling — and without the tax bill.
You keep your position. Long-term crypto holders use borrowing to stay exposed to ETH or Bitcoin while still getting liquidity for real-world expenses.
There’s no credit check. Traditional lenders look at your income, credit score, and employment history. Aave looks at none of that. You put up collateral, and the protocol lends you money instantly and permissionlessly. Anyone with a crypto wallet and some assets on Aave can borrow. If you’re still setting up your first DeFi wallet, start with Post 37: Your First Token Swap.
The tradeoff? Your collateral is at risk if the market moves against you.
How Collateral and Loan-to-Value (LTV) Work on Aave
When you borrow on Aave, you don’t borrow against thin air. You borrow against assets you’ve already deposited — the same assets you deposited when you tried lending in Post 39.
Aave assigns a Loan-to-Value (LTV) ratio to each asset. This number tells you the maximum you can borrow relative to what you’ve deposited.
For example:
- ETH has an LTV of roughly 80%
- That means if you deposit $1,000 worth of ETH, you can borrow up to $800 USDC
The Aave collateral ratio is set by Aave’s governance and differs by asset. Riskier, more volatile assets have lower LTVs. Blue-chip assets like ETH and WBTC have higher LTVs.
A practical example: You deposit $1,000 in ETH. Aave shows you a maximum borrowing power of $800. But you should never borrow the maximum — we’ll explain why in a moment.
For most beginners doing DeFi borrowing for the first time, borrowing 30–40% of your collateral value is a much safer starting point. That would be $300–$400 against your $1,000 ETH.
The Health Factor: The Number That Matters Most
Once you have an open loan on Aave, the most important number on your dashboard is your Health Factor.
In plain English: the Health Factor is a score that tells you how safe your loan is.
- Above 2.0: You’re well-protected. The market would need to drop significantly before you’re in danger.
- Between 1.0 and 1.5: Caution zone. A moderate price drop could put you at risk.
- Below 1.0: Liquidation is triggered.
The formula behind it:
Health Factor = (Collateral Value × Liquidation Threshold) ÷ Borrowed Amount
The liquidation threshold is slightly higher than the LTV — for ETH, it’s typically around 82.5%. If your Health Factor drops below 1.0, Aave allows liquidators (automated bots and arbitrageurs) to repay part of your debt and claim a portion of your collateral at a discount.
What does liquidation actually mean?
It means you lose some of your collateral. A liquidation event isn’t just a paper loss — Aave sells a chunk of your deposited ETH to cover the debt, and you don’t get to choose when or at what price. The crypto liquidation risk here is real and irreversible once triggered.
The safest rule: keep your Health Factor above 1.5, ideally above 2.0.
How to Borrow on Aave: Step by Step
Before you start, make sure you have:
- Crypto deposited as collateral on Aave (covered in Post 39)
- ETH in your wallet for gas fees (Post 36: What Is Gas?)
Step 1: Open the Aave dashboard. Go to app.aave.com and connect your wallet. You’ll see your deposited assets and your available borrowing power.
Step 2: Go to the Borrow section. Click “Borrow” next to the asset you want to borrow. For beginners, start with a stablecoin like USDC. Borrowing a stablecoin means your debt amount stays stable — you owe $300 USDC and you’ll still owe $300 USDC (plus interest) regardless of what ETH does.
Step 3: Choose stable or variable interest rate. Aave gives you two options:
- Variable rate: Changes with market conditions. Usually lower, but can spike during high demand.
- Stable rate: Locked in (mostly), usually slightly higher than variable.
For short-term borrowing in normal conditions, variable works fine. If you’re borrowing for a longer period or rates are already high, consider stable.
Step 4: Choose your borrow amount carefully. You’ll see your Health Factor update as you adjust the amount. Aim for a Health Factor of at least 1.5 after the borrow. The dashboard shows this in real time.
Step 5: Confirm the transaction. Your wallet will ask you to approve the transaction and pay a gas fee. Once confirmed, the borrowed assets arrive in your wallet immediately.
Risk Management Rules for DeFi Borrowing Beginners
If you take nothing else from this post, take these four rules:
1. Never borrow more than 30–40% of your collateral value. This gives you enough buffer that a 40–50% market drop won’t trigger liquidation immediately.
2. Set a price alert on your collateral asset. If ETH drops 20% from when you borrowed, your Health Factor is dropping. Use an app like Blockfolio or the Aave mobile dashboard to catch it early.
3. Check your Health Factor daily during volatile markets. A quiet week can turn into a liquidation event overnight. Aave lets you repay partially to restore your Health Factor without fully closing the loan.
4. Consider this an advanced feature. Borrowing on Aave is not where most beginners should start. If you haven’t tried lending first, do that. Get comfortable with how Aave works before adding debt into the picture. The loan-to-value ratio in DeFi should be treated as a ceiling, not a target.
How to Repay Your Loan
Repaying is straightforward:
- Go to your Aave dashboard and click “Repay” on your open loan
- Choose how much to repay — you can repay partially or fully
- If you borrowed USDC, you repay in USDC plus the accrued interest
- Once fully repaid, your collateral is unlocked and you can withdraw it
Important: Interest on Aave accrues continuously, not monthly. If ETH is falling fast and you borrowed stablecoins against it, your Health Factor deteriorates in real time. During volatile markets, check daily.
Once the loan is fully repaid, your deposited ETH is available to withdraw again.
The Bottom Line
Borrowing on Aave is one of DeFi’s most powerful tools — and one of its easiest ways to get burned if you don’t understand the Health Factor. The concept is simple: put up collateral, borrow against it, keep the Health Factor healthy, repay when you’re done.
Start small. Borrow 30% of your collateral, watch the Health Factor for a week, and understand how it moves before you scale up. DeFi borrowing for beginners doesn’t need to be scary — it just needs to be understood first.
Ready to build a safe DeFi strategy from day one? Follow the 90-Day Wallet Security Progression — a structured plan that walks you from setting up your first wallet to safely using protocols like Aave without taking unnecessary risks.