Iron doped LiNbO3 crystals with different iron valence states are investigated. An extended x-ray absorption fine structure (EXAFS) spectroscopy study highlights evident changes in the local structure around iron that can be ascribed to the presence of small polarons. In particular, when a Fe3+ replaced a Li ion, the oxygen octahedron shrinked with respect to the pure material, with an average iron-oxygen bond value very similar to that of Fe2O3 hematite. When adding an electron, it localizes at the Fe site in a configuration very close to the atomic Fe d orbitals, inducing a relaxation of the oxygen cage. The same system was modelled by spin-polarized density functional theory (DFT). Several local as well as hybrid exchange-correlation functionals were probed on the bulk LiNbO3 structural properties. The computation is then extended to the case of hematite and finally to the Fe defect in LiNbO3. The calculations reproduced with good accuracy the large lattice relaxation of the oxygen ligands associated to the electronic capture at the Fe center that can be interpreted as due to the polaron formation.The calculations reproduce satisfactorily the available EXAFS data, and allow for the estimation of the polaron energies and the optical properties of the defect.