Did you know that cryptocurrencies are gaining popularity as a means of exchange? As decentralised finance has gained increasing recognition in recent years, investors can now use their digital assets to get a crypto loan.
However, crypto loans are still a relatively new concept. Therefore, many people need to become more familiar with how they work. With the rising inflation in the US and all over the globe, more people are considering crypto loans.
Today, we’ll look at the complexities of crypto loans, how they differ from a traditional loan, and explain how you can get one yourself.
Understanding Crypto Loans
A cryptocurrency loan uses your digital assets as collateral. If you cannot make your payments, the lender can sell your crypto to compensate. Traditional loans work similarly. However, instead of using crypto as collateral, they use real estate or a car to back their loan.
There are two types of crypto loans you will come across: CeFi and DeFi crypto loans. The first is the most common type of crypto backed loan and is often offered by crypto loan providers. The major characteristic of centralised finance loans is that the lending company keeps hold of your assets during your loan period. So in a sense, you should keep that in mind if you are wondering, are crypto loans safe? Your crypto will be as safe as the company that looks after it.
DeFi loans are less popular. They enable you to access borrowed funds from a dApp on the blockchain. You retain ownership of your holdings, but the lender can still repurpose them if you default. Typically, a smart contract is used to ensure both parties meet the terms of their loan agreement. An important characteristic to remember is that compared to CeFi loans, DeFi loans have higher interest rates.
Pros and Cons of Borrowing Crypto Loans
Before considering a crypto loan, looking at the advantages and disadvantages of CeFi and DeFi borrowing is important. Like any loan, that are some risks alongside the perks you should keep in mind.
| Perks | Drawbacks |
| Crypto backed loans are easier to obtain than traditional loans and require less documentation. | The value of the collateral can fluctuate rapidly, which might force the borrower to sell the cryptocurrency if the market crashes. |
| Your repayment options can be flexible if you struggle to repay your loan, unlike loans at traditional banks. | As the popularity of crypto loans grows, so does the number of fraudulent platforms claiming to provide crypto loans. |
| The interest rates on a crypto loan are lower. | You may need to provide more collateral for your loan if the crypto price you selected drops. |
| You don’t need to go through a credit check. |
Where To Get Crypto Loans
Before you can borrow a crypto loan, you must own some cryptocurrency. If you haven’t obtained any coins yet, you can visit a platform like https://immediate-edge.io and ensure you have some future crypto assets. You never know what could happen, and having the option for a crypto loan can be a huge benefit.
Otherwise, if you own a cryptocurrency and want to use it for collateral, you can visit some popular platforms that specialise in crypto lending. It depends on whether you want a DeFi or CeFi loan. With this in mind, platforms like Nexus, Celsius and BlockFi are excellent choices for both. You can use crypto to borrow fiat currencies, stablecoins and other cryptocurrencies.
Who Are Crypto Loans For?
Opting for a crypto loan certainly isn’t for everyone. Typically, people borrow a crypto loan for three major reasons:
- To access the worth of their crypto without exchanging it. If you need a large sum of money and you know you have its worth in crypto, you can borrow the cash in exchange for your crypto. That way, if you want to keep your crypto investment for future gains, you can repay the loan and have access to it again.
- To keep their financial data private. Most of the time, you can obtain a crypto loan without your credit being checked or nosy bankers questioning how you plan to utilise the money.
- To access the cash, they otherwise can’t. If you just invested far too much in crypto and happen to need cash, you can access the value of your crypto savings without selling it. You also won’t need to pay capital gains tax for selling your crypto.
Step-By-Step Guide for Borrowing a Crypto Loan
Are you interested in opting in for a crypto loan? It’s not as complicated as you might think. There are a total of six steps. All you need is your crypto wallet, a computer and some stable WiFi, and you can start!
Step 1: Select a Platform
Take a look at some popular platforms for crypto loans online. Many articles highlight the best and most reliable websites for your needs. Just make sure it has the right loan for you (either centralised or decentralised) and either the fiat currency you want for it or an alternative currency.
Step 2: Choose Your Collateral
Now that you’ve registered on the platform of your choice, it’s time to select a cryptocurrency you want to use as collateral. Two popular options are widely available – Bitcoin (BTC) and Ethereum (ETH). ETH’s value doesn’t fluctuate as much as other types of tokens, which is often why people choose it. On the other hand, Bitcoin is a popular choice for those wishing to receive stablecoins in return. There are other options, such as Litecoin (LTC), Avalanche (AVAX) and Polygon (MATIC) and more, which vary from platform to platform.
Step 3: Choose A Payment Plan
Usually, you are asked to choose between an interest-only loan and an interest and principal crypto loan. In the first instance, you only need to pay interest in weekly instalments (but some platforms offer quarterly and monthly payments as well). The principal sum of your loan remains the same, and you can pay it all back at the end of your loan term.
In the second case, a borrower has to pay both a portion of the principal loans and the interest payments monthly. As the loan term progresses, the payment lowers the loan balance until paid in full.
Step 4: Choose the Sum You Want To Borrow
The lender’s policies and the kind of cryptocurrency used as collateral will influence the loan rates, loan period and value LTV ratio. The loan duration might be from a few months to several years, and the loan amount is often a proportion of the value of the collateral. The loan amount to collateral is known as the value LTV ratio. The creditor can borrow more money concerning the value of their collateral if the LTV ratio is higher.
Typically, crypto loan platforms will cap the LTV at 80%. If you borrow $8000, you must offer at least $10000 as collateral. But remember that large LTVs typically come with higher interest rates and increased liquidation risk. By keeping the LTV low, you’ll save money and enjoy low-interest rates.
Step 5: Connect Your Crypto Wallet
You won’t be able to complete your loan process without providing the collateral. You need to connect your crypto wallet to the loan provider. Ensure you have a wallet key ready so the provider can access your funds.
Step 6: Complete The Transfer
Finally, it’s time to deposit your cryptocurrency at the loan site. Once you provide the wallet key, the lender can access your crypto holdings if they have to sell them and repay your loan. The funds may be made available right away, or you might need to wait a day or two for it to land.
What Can You Use a Crypto Loan For?
A crypto loan can be used, among other things, to get liquidity without selling your crypto asset, allowing you to keep it and possibly profit from any future price growth.
A stablecoin loan, a form of crypto loan valued in a stablecoin like USDT or USDC, is an additional choice. This can be helpful if you want to access the value of your cryptocurrency asset without being impacted by market volatility. Some banks can also offer crypto loans.
Choosing a secure lender and knowing the hazards is crucial if you get a crypto loan. One such risk is the potential for market collapses, which might lead to a sharp decline in the value of your crypto asset. Hence, it’s crucial to have a strategy for how to respond to such a situation.
Final Thoughts
In conclusion, obtaining a loan in cryptocurrency is a possibility, though it is still a relatively new phenomenon. Loans made using cryptocurrencies may have advantages, such as greater security and privacy, but they also carry a high risk of loss due to regulatory ambiguity and volatility. Before taking out a bitcoin loan, borrowers should carefully weigh the risks and do the research. Most importantly, consider the loan to value LTV and the loan’s conditions. It is advisable to consult a specialist before making any financial decisions.
The success of crypto loans will ultimately depend on their capacity to offer a trustworthy and steady alternative to conventional lending while resolving the issues and difficulties that come with doing business in a complex market that is continually growing.