Crypto loans offer an alternative to traditional fiat loans. Read this article to get to know more about them!
If you have crypto coins, you can use them as collateral for loans. You’ll get immediate access to cash without selling your crypto. The interest rates in this segment are typically low — but there are a few downsides that you should take into account. From this article, you’ll learn all the basic information about crypto loans.
What Is a Crypto Loan?
It’s a secured loan that works according to this scheme:
- You provide your crypto savings as collateral to the lender
- They transfer cash to you
- You pay your debt back in installments
- Once you’ve paid out the full amount of your debt plus the interest rate, you’ll get your crypto back
The maximum sum that you can borrow can vary from one lender to another. Some platforms might provide you with liquidity that equals 90% of the crypto assets that you store on that platform. Others would give you only 40%. Predictably enough, Bitcoin and Ethereum are the most popular coins used for loans.
You might be required to pay out the debt in a week, in a few months or even in a few years. The interest rate normally falls within the range of 0% to 14%.
How to Get a Crypto Loan?
To get fiat cash for lending your crypto, stick to this scheme:
- Find a reputable lender
- Make sure it accepts the crypto assets you owe as collateral
- Glance attentively through its eligibility requirements, application process and terms and conditions
- Sign up for the lending platform
- Verify your identity and crypto holdings
- Choose the type of loan, its terms and the amount
- Submit your request
- Wait for approval
Most likely, a credit check won’t be required — but you might need to open a wallet with your collateral on the lender’s website. Or, they might ask you to use a specific third-party wallet, such as Vexel.
Crypto lenders usually approve the requests very quickly. The fastest ones do it in a few seconds and transfer money to their clients within 24 hours. Many lenders offer handy calculators to users so that they can estimate the sum that they’ll need to return.
How to Use a Crypto Loan?
Crypto loans are considered to be personal loans. The lender won’t ask you why you need cash. Feel free to use these funds to launch a business, pay for your kids’ education, purchase a house or refinance another debt.
Some lenders would give you a loan in fiat currency. Others would transfer stablecoins to you whose price is pegged to a fiat currency or gold. Moreover, selected lenders would give you only crypto whose price might be as volatile as that of the asset that you use as collateral.
Who Is the Target Audience of This Service?
Crypto loans are popular among individuals who believe that the price of the assets they owe will go up in the future. Otherwise, they would have sold these coins to get cash.
Types of Crypto Loans
All crypto loans can be classified into two categories: CeFi and DeFi.
The former acronym stands for Centralized Finance. These are custodial crypto loans, the most popular type. They mean that you give the lender complete control over your crypto until you pay out the debt.
The DeFi acronym denotes Decentralized Finance. Such loans rely on smart contracts. You remain the only person who controls your crypto savings. But if you miss the payment or violate the terms of your agreement in some other way, actions will be taken against you automatically. DeFi crypto loans might feature higher interest rates than CeFi.
What Are the Risks of Crypto Loans?
Compared to traditional banks, crypto loans have less oversight. In the worst case, your lender might go bankrupt or get hacked. If this happens, you might fail to ever get your money back.
The second risk is connected with the volatility of the crypto market. If the price of the asset that you used as collateral decreases, the lender might ask you to provide more coins to them. If you fail to do so, they might liquidate your assets. Some lenders automate the process of increasing the sum of the collateral.
Besides, you might lose your savings if you miss payments.
To minimize risks, you should thoroughly research the market to detect the best lender. Scrutinize its security protocols and read its customer reviews.
Hopefully, you found this article informative and now you better understand the essence of crypto loans. On the one hand, it’s your chance to get quick cash without selling your cryptocurrencies. That’s great if you believe that the price of the assets you owe will grow in the future. On the other hand, you risk losing all your crypto if you fail to pay out your debt or the lender gets hacked.
Disclaimer: This is a guest post. Coinpedia does not endorse or is responsible for any content, accuracy, quality, advertising, products, or other materials on this page. Readers should do their own research before taking any actions related to the company.