Crypto Loans 101 — All You Need to Know

If you want to learn about crypto loans, you’ve come to the right place. In this guide, we’ll tell you how crypto loans work, i.e., how to borrow and lend digital currencies. You’ll also find out what are the main benefits and risks of taking crypto loans.

Furthermore, we’ll talk about the main alternatives to crypto loans. Plus, you’ll learn which factors to consider while choosing a good crypto loan platform.

Here’s all you need to know about cryptocurrency loans.

What Is Crypto Lending?

This term refers to the process of borrowing and lending cryptocurrency through top-tier crypto exchanges or lending platforms in exchange for interest. This type of secured loan uses crypto holdings as collateral, which are returned to borrowers after they have paid off their loan in full.

Crypto loans can be CeFi and DeFi. When it comes to the former, the lender has control over deposited cryptocurrencies, while the latter relies on smart contracts.

Crypto lending has many benefits, such as a lack of credit checks and lower interest rates. However, it comes with risks like losing your collateral in case of missed payments.

How Do Crypto Loans Work?

A crypto-backed loan works in two ways. It allows you to borrow and lend digital currency. Here’s how to do both.

How to Borrow Crypto

How to borrow against crypto? Easy. Investors will first have to create an account on a centralized lending platform. They can also borrow against crypto by linking their crypto wallets to a decentralized lending site. The next step is choosing the type of loan and entering the amount they want to borrow.

The last step refers to depositing collateral, after which all funds will be transferred to their user account or crypto wallet.

Keep in mind that the quota of available funds will depend on the deposited amount and collateral. Loans will usually be approved immediately, while their terms will be secured through smart contracts. The loan-to-value ratio is often low since cryptocurrencies are highly volatile.

Investors will be able to borrow 25% to 70% of their crypto holdings. They’ll also get to pay off their loan in monthly installments. Once they pay off their loan, they’ll get their collateral back.

How to Lend Crypto

To lend cryptocurrencies, investors will need to set up an account on the lending platform of their choice. They will then have to deposit the desired digital value into the platform’s wallet and specify the amount and loan period. After that, the platform will compare lending requests with borrowing requests to find a match.

Once an interested party is found, the lenders will start earning interest. On centralized lending platforms, interests are paid via the platform’s native token or in kind. On the other hand, decentralized platforms pay interest in kind or via bonuses.

After the loan period ends, lenders can either continue lending their digital currencies or take out their funds. When it comes to the crypto lending rate, it usually ranges between 3% and 8%, although for stablecoins, this rate is much higher — between 10% and 18%. However, every crypto loan site will charge different rates for different digital currencies.

Types of Crypto Loans

Now that you know how to borrow and loan against crypto, here’s what types of loans you can take:

Collateralized Loans

Crypto collateral loans refer to using a digital currency as collateral. Most lending sites will allow borrowers to use a certain percentage of their deposited collateral, which is usually below 90% LTV. A lower LTV equals lower interest rates and reduced risk from margin calls. This is exactly what makes these types of Bitcoin loans very popular among borrowers and lenders.

Uncollateralized Loans

These crypto-financing loans resemble personal loans since they work on a similar principle. Namely, to borrow cryptocurrencies, applicants must fill out a form and go through the verification process to get approved for a loan.

However, since uncollateralized loans don’t involve depositing collateral, they are more risky for lenders.

Crypto Line of Credit

This type of loan is unconventional because it doesn’t offer loans with a predetermined payment term. Instead, borrowers can take out a certain percentage of their holding collateral without following the predetermined repayment conditions.

In other words, the borrowers will only have to cover the interest on the funds they take out.

Flash Loans

Flash loans are instant loans that will most often be offered by crypto exchanges. These types of loans provide borrowing and repaying within the same transaction. Therefore, they are usually used for buying and selling digital currencies in different markets.

For example, you can use them to buy a digital currency at a lower price on one market and sell it at a higher price on another. All of this will take place within the same transaction.

Pros and Cons of Crypto Lending

Lending and borrowing crypto comes with many benefits and a few risks that you should keep in mind.

Crypto Lending Advantages

Why borrow crypto? There are several reasons. First, crypto loans don’t require credit checks. This means that they’ll be available even to people who don’t qualify for a bank loan. The second advantage is lower interest rates.

Moreover, lenders can earn passive income on their crypto mortgage. Other benefits include immediate approvals and flexible loan terms. In addition, you can use crypto loans for multiple purposes, such as paying off debts and covering urgent expenses.

Crypto Lending Disadvantages

The main drawback of crypto lending is related to regulatory issues. In case of illegal events, borrowers may lose their crypto assets. ‍Furthermore, to get crypto loan approvals, borrowers will have to own crypto assets. Finally, failing to pay off the loan will result in the loss of the collateral.

What Is a Crypto Lender and How to Choose Lending Platforms

Crypto lenders are CeFi and DeFi services through which investors can deposit and lend their digital currency to borrowers in exchange for interest. This means they act as an intermediary between lenders and borrowers. These payments can take place every day, week, or month.

Both CeFi and DeFi platforms provide high-interest rates that can exceed 20% APY, depending on the crypto lender. Likewise, both will ask the borrower to put their cryptocurrency as collateral. The amount of the crypto loan will be displayed as a percentage of the value of the digital currency that borrowers give as collateral.

To choose the best crypto lending platform, keep in mind the following factors:

Security and Reputation

A good lending platform must use strict security measures, like two-factor authentication, to protect its users from potential hacks. Moreover, opt for platforms that have positive reviews and a good reputation among users. They must follow crypto regulations.

Interest Rates

Each lending platform will offer different interest rates. This means that before taking a loan, you should compare the interest rates on different platforms to find the one that suits you best. Avoid sites that offer unrealistically high returns. Instead, give preference to platforms whose rates are in line with the crypto market.

Lending Terms

Opt for sites that offer flexible loan terms when it comes to their duration, as well as platforms that offer the option of loan customization.

Supported Cryptocurrencies

Choose sites that, in addition to well-known cryptocurrencies, also support lesser-known altcoins. This diversity will allow you more flexibility.

Customer Support

A good lending site must have a professional support team that responds quickly to inquiries. You should also give preference to platforms that offer 24/7 live chat, email support, and phone support.

How to Get a Crypto Loan

The process of getting a crypto loan will depend on the lending platform you choose. However, this usually involves the following steps:

• Create an account on the lending platform of your choice. This can be a centralized or decentralized platform, as well as a crypto exchange.
• Choose the cryptocurrency that you will deposit as your collateral. The most popular options are BTC and ETH.
• Choose which type of loan you want to take. This can be collateralized loans, uncollateralized loans, flash loans, or crypto lines of credit.
• Choose the amount of your loan, which will depend on the quantity of your collateral.
• Set up your crypto wallet and link it to your user account and transfer your collateral. Most platforms will approve your loans immediately.

Crypto Lending Alternatives

How to borrow against Bitcoin if you want to avoid getting crypto loans? You can take an alternative route, which involves taking a conventional loan or a personal loan for cryptocurrency.

Personal Loan

A personal loan is a contract by which a lender borrows a specific amount of money from a borrower. The borrower must return the money in a specific time frame, as well as pay the interest rate.

There are also unsecured personal loans that don’t ask borrowers to deposit collateral. The interest rates of these types of loans are closely related to the applicant’s credit score. The amount of the loan can go from $1,000 to $100,000, while applicants will have to repay the loan between one and seven years.

Conventional Loan

These are types of mortgage loans that are obtained through a credit union or bank. To qualify for a conventional loan, the applicant must have a good credit score. Moreover, these loans usually have a fixed interest rate that doesn’t change during the duration of the loan.

Conclusion

Crypto lending is a type of secured loan that allows the owner of digital currencies to lend their coins to other people in exchange for interest. This mechanism involves three participants – the lender, the borrower, and the lending platform. Each participant can benefit from crypto loans. The lender earns interest, the borrower gets access to digital coins, while the lending platform earns through fees.

Crypto loans also imply holding cryptocurrencies as collateral, which will be returned to borrowers after they pay off their loans.

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