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Hole polarons and defect-bound exciton polarons in lithium niobate are investigated by means of density-functional theory, where the localization of the holes is achieved by applying the <inline-formula><math xmlns="http://www.w3.org/1998/Math/MathML" display="inline"><semantics><mrow><mo>+</mo><mi>U</mi></mrow></semantics></math></inline-formula> approach to the oxygen <inline-formula><math xmlns="http://www.w3.org/1998/Math/MathML" display="inline"><semantics><mrow><mn>2</mn><mi>p</mi></mrow></semantics></math></inline-formula> orbitals. We find three principal configurations of hole polarons: (i) self-trapped holes localized at displaced regular oxygen atoms and (ii) two other configurations bound to a lithium vacancy either at a threefold coordinated oxygen atom above or at a two-fold coordinated oxygen atom below the defect. The latter is the most stable and is in excellent quantitative agreement with measured <i>g</i> factors from electron paramagnetic resonance. Due to the absence of mid-gap states, none of these hole polarons can explain the broad optical absorption centered between 2.5 and 2.8 eV that is observed in transient absorption spectroscopy, but such states appear if a free electron polaron is trapped at the same lithium vacancy as the bound hole polaron, resulting in an exciton polaron. The dielectric function calculated by solving the Bethe–Salpeter equation indeed yields an optical peak at <inline-formula><math xmlns="http://www.w3.org/1998/Math/MathML" display="inline"><semantics><mrow><mn>2.6</mn></mrow></semantics></math></inline-formula> eV in agreement with the two-photon experiments. The coexistence of hole and exciton polarons, which are simultaneously created in optical excitations, thus satisfactorily explains the reported experimental data.