As with most aspects of the crypto space, crypto loans continue to increase in popularity. Traditional bank loans can be traced all the way back to 1754 BCE when the price of silver was defined, and the interest rate was regulated. Since then, loans have played a vital role in our society, and lenders are continuing to accept more types of assets as collateral.
Now, due to the value and prevalence of cryptocurrency, this asset is also being considered by lenders worldwide as an acceptable collateral. For some, crypto loans are a much more appealing option as they allow traders to make a profit from their assets without selling them, among other benefits. With Bitcoin being the world’s most popular crypto, this coin is often the first choice for borrowers interested in getting a crypto loan.
In this article, you’ll learn how to get a Bitcoin crypto loan through our helpful checklist! We’ll also highlight the advantages and disadvantages of Bitcoin crypto loans, so you can decide if getting one is a good option for you.
What Is a Crypto Loan?
If you know what a traditional loan entails, you’ll have no trouble understanding what a crypto loan is. A crypto loan is simply a loan whereby borrowers use their cryptocurrency holdings as collateral rather than fiat currency or other types of assets.
Collateral can be any asset that a borrower pledges for their loan to be approved by a lender. This is necessary for loan approval as it reduces the risk to the lenders. If a borrower is unable to or refuses to pay their loan, the lender can seize their collateral to offset losses from the loan itself.
Traditionally, collateral assets can include cash, stocks, real estate, automobiles, equipment, and inventory. Of course, ‘crypto collateral’ refers to a cryptocurrency asset that is used as collateral. This can include many types of different cryptocurrencies, but typically, lenders are more open to accepting less volatile and more established coins such as Bitcoin.
How To Get a Bitcoin Crypto Loan (Checklist)
Want to get a Bitcoin crypto loan? Use this handy checklist! If you can answer ‘yes’ to all these questions, then you’re ready to get your loan!
- Do You Have Bitcoin To Use as Collateral?
To get a Bitcoin crypto loan, you need to have Bitcoin assets that are ready to be used as collateral. If you’re a trader who already has Bitcoin in your crypto portfolio, then you can skip this step. If, on the other hand, you don’t own any Bitcoin yet, we’ll show you how you can buy some!
Buying your first crypto can be a stressful experience, and often, first-timers need help figuring out where to start. Thankfully, the crypto space is continuing to become more accessible, so you have more beginner-friendly options than ever before.
For example, if you want an expert at your side supporting you as you purchase Bitcoin and other cryptocurrencies, you can opt for a crypto broker. Crypto brokers can help out users and allow them to confidently make trading decisions using various tools and resources. These brokers can benefit all types of traders but are especially useful for anyone who is new to the crypto market.
To be matched with the best broker for your needs, we suggest using a crypto platform. A crypto platform will use your data to connect you with a well-rounded broker that you’re most compatible with. Crypto platforms such as Immediate Connect and KuCoin will save you plenty of time and hassle when buying Bitcoin and other crypto assets. Once you’ve been paired with a broker you’re happy with, all you have to do next is buy Bitcoin to use as collateral!
- Have You Found a Crypto Lender?
If you have your Bitcoin assets ready to use as collateral, you’ll then need to find an appropriate lender. This is one of the most crucial steps regarding crypto loans, as choosing the wrong lender can put your crypto assets at risk. For instance, if your chosen lender becomes insolvent or is untrustworthy, then you may lose access to your crypto holdings.
It’s important to find a crypto lender that is not only safe but also perfectly suits your needs. The ideal crypto lender can vary drastically between different borrowers. This is influenced by factors such as how much they want to borrow, which type of loan they want, and how they want to repay their loan.
Before deciding on a crypto lender, you should know the answer to the following questions:
- Which assets can I use as crypto collateral?
- What is the interest rate?
- What is the minimum and maximum loan amount size?
- Which types of loans are available?
- Are yearly and monthly payments accepted?
- What is the Loan to Value range?
- Is there a KYC requirement or credit check?
If you’re struggling to find a crypto lender, you can sign up for a crypto lending platform such as Aave. Since these platforms act as the middleman between borrowers and lenders, you can be connected with a suitable crypto lender without needing to search for one yourself!
- Do You Know How Much You Want To Borrow?
Before asking for a loan from your chosen lender, you’ll need to know how much you can borrow. Many lenders have a minimum and maximum loan size limit that you’ll have to account for when making your decision. You should also keep in mind that you’ll have to pay interest for your loan.
Although it varies between each lender, you can determine how much interest you’re likely to pay through the Loan-to-Value (LTV) ratio. Lenders and traditional banks use this ratio to decide a loan’s eligibility and interest rate. The Loan to Value is calculated by comparing the amount that the borrower is requesting and the value of the assets they are using as collateral. To help you visualise this, we included the LTV formula below:
(Loan balance/value of assets)* 100 = Loan to Value %
For example, if you want to borrow €10,000 and you have Bitcoin assets that are worth €15,000, your LTV will be 66%. You can see the formula here: (10,000/15,000)* 100 = ~ 66.
Typically, the higher your Loan to Value percentage, the more high-risk your loan is considered to be. Due to this, many lenders do not approve loans with an LTV that is higher than 80%. Those that do will likely charge a much higher interest rate, so keep this in mind when deciding how much you want to borrow with your Bitcoin assets!
- Have You Chosen the Type of Loan You Want?
When it comes to crypto loans, borrowers have two main options. Depending on your preferences, you can choose to get a custodial (CeFi) or non-custodial (DeFi) loan.
CeFi loans are handled through a centralised exchange and are the most similar option to traditional bank loans. The central exchange handles the collateral that borrowers pledge, meaning that you cannot access your crypto assets throughout your loan. CeFi loans typically have favourable interest rates, and many consider them to be the safer option. However, as with traditional banks, CeFi requires credit checks and other identification processes such as Know Your Customer (KYC).
DeFi loans, on the other hand, consist of peer-to-peer loans that are based on smart contracts. Through a decentralised application (dApp), users can add their crypto assets to a ‘lending pool’ without needing a centralised exchange. With a DeFi loan, you still have access to your private keys, and since the process is permissionless, you don’t need to complete a KYC or credit check. Although DeFi loans are more transparent and anonymous than CeFi loans, they pose a higher risk to borrowers.
We suggest you take your time to consider the pros and cons of these two types of loans before making a decision!
If you can answer ‘yes’ to the questions we’ve listed, congratulations! You’re ready to get your Bitcoin crypto loan!
Once your lender approves your loan, you just need to transfer over your Bitcoin. You can do this by either directly depositing your assets or handing over your private wallet keys to your lender. Shortly after, your borrowed cash (or any other assets you have chosen to borrow) will become available!
The Benefits of Getting a Bitcoin Crypto Loan
Find out the main benefits of Bitcoin crypto loans!
Lower Interest Rates
If you get a crypto loan, you will likely pay a lower interest rate compared to a traditional loan. This makes crypto loans a fantastic option for anyone who wants to save as much money as possible when getting a loan.
As you already know, you can calculate your LTV to get a general idea of what interest rate you’ll pay. You should also check the interest rates of any crypto lender you’re considering using.
Faster Processing Speeds
If you’re in a rush, then you’ll appreciate how fast Bitcoin loans can be processed. Usually, your lender will swiftly approve your loan so you can wait for your assets to become available.
Although it varies between each lender, you can typically gain full access to your assets within anywhere between a few minutes and a couple of hours. With traditional loans, this process can take up to a couple of days.
Crypto loan borrowers have the advantage of increased privacy over traditional bank loan borrowers. When getting a crypto loan, you likely won’t have to complete any credit checks or other requirements. This means you can get a Bitcoin loan fully anonymously! For even more privacy, we recommend that you choose a DeFi crypto loan.
The Drawbacks of Getting a Bitcoin Crypto Loan
Before getting your Bitcoin loan, you should also consider the disadvantages of these types of loans.
Since the majority of crypto lenders are unregulated, crypto loans are riskier than other types of loans. Your chosen lender may become insolvent, and in this case, your assets will not be protected. Some lenders may also be illegitimate or untrustworthy, which is why we suggest using a crypto lending platform. These platforms evaluate and filter out lenders that appear to pose a risk to borrowers.
Limited Access to Bitcoin Holdings
If you want to have continued access to your Bitcoin assets, then you may not want to get a Bitcoin loan. With most loans, you will have limited access to your collateralised assets, which may be problematic. For instance, if you notice the value of Bitcoin rapidly changing in value, you will not be able to quickly alter your portfolio.
So, the answer to our original question – “Is it possible to get a Bitcoin crypto loan?” is yes! Crypto loans are already an incredibly popular option due to their lower interest rates, faster processing speeds, and increased privacy. Although these types of loans do have some disadvantages, they are still an appealing option for anyone who wants to use their cryptocurrency to borrow various other assets.
As the most valuable and well-known cryptocurrency, Bitcoin is often the go-to choice for crypto lenders. Since this coin is less volatile than newer coins and has already successfully withstood economic pressures, lenders consider it a lower-risk asset to collateralise. As you’ve seen in this article, getting a Bitcoin loan is fairly straightforward, and you don’t need to be a trading expert to succeed!