How Does a Crypto Loan Work?
Crypto lending is the process of depositing cryptocurrency that is lent out to borrowers in return for regular interest payments. Payments are made in the form of the cryptocurrency that is deposited typically and compounded on a daily, weekly, or monthly basis.
What Is a
Crypto Loan?
Crypto loans allow you to borrow a lump sum of money in return for putting up your cryptocurrency assets as collateral. Lenders provide these loans through their platform with low interest rates and no origination fees.
A crypto loan works much like a traditional line of credit — a borrower is approved for a loan, funds are deposited into their account, and they are assigned a repayment schedule with a monthly payment that covers the principal of the loan as well as interest, or just interest in the case of an interest-only loan.
In the case of a traditional loan, a physical asset such as a vehicle or a real estate property may be the collateral for the loan.
Types of Crypto Loans
There are 2 types of crypto loans: CeFi and DeFi.
- Centralized Finance, or CeFi, loans are custodial crypto loans where a lender has control over your crypto during the repayment term. Most crypto loans fall under the CeFi umbrella.
- Decentralized Finance, or DeFi, loans rely on smart contracts to ensure you adhere to the loan requirements. You retain control of your crypto assets, but a lender can take automatic actions against your account if you default or miss a payment. DeFi crypto loans can have higher interest rates than CeFi.
How do You
Get a Crypto Loan?
To get a crypto loan, you must own any of the cryptocurrencies that are accepted for loans. Check with your lender on which coins are accepted.
Next, research reputable lenders and find the one that works best for you. Each lender has its own application process, so read the eligibility requirements and terms and conditions carefully.
Create an account with your chosen lender to begin the application process.
Complete the account opening process, including verifying your crypto holdings and identity.
What are the common crypto loan terms?
Interest
RATEMargin
CALLGrace
PERIODOrigination
FEEWhat Can I Use a Crypto Loan For?
When you borrow against your crypto, you can use the loan proceeds for anything you desire. The lender will fund your loan directly to your bank account, and you can use the proceeds as you wish.
Crypto real estate
mortgages
some borrowers will borrow against their crypto to acquire real estate or in particular, rental properties.
Read More
Buying More
Crypto
borrowing against your crypto provides you with cash that can be used to buy even more crypto. This helps investors "buy the dip"
Read More
Paying Your
Taxes
borrowing against your crypto is an easy way to raise cash to pay income taxes without needing to sell your crypto.
Read More
Features Of
Crypto Loans?
Compared with traditional secured loans, crypto loans have unique features that can make them appealing for some crypto enthusiasts:
- Low interest rates: While they’re generally not as cheap as mortgage or car loans, crypto loans are an inexpensive alternative to personal loans and credit cards.
- Loan amount is based on asset value: In many cases, you can borrow up to 50 percent of your portfolio value, but some exchanges go as high as 90 percent.
- Choice of loan currency: Depending on the platform and what you need, you can generally get the loan funds in the form of U.S. dollars or select cryptocurrencies.
