Crypto loans offer an alternative to traditional fiat loans. Read this article to know more about them!
If you have crypto coins, you can use them as collateral for the loan. You will get instant access to cash without having to sell your crypto. Interest rates are generally lower in this segment – but there are some drawbacks that you should keep in mind. From this article, you will learn all the basic information about crypto loans.
What is a crypto loan?
It is a secured loan which works as per the scheme:
- You provide your crypto savings to the lender as collateral
- they transfer you cash
- You pay your loan in installments
- Once you have paid off the full amount of your loan and the interest rate, you will get your crypto back
The maximum amount you can borrow varies from lender to lender. Some platforms can provide you with liquidity that is as high as 90% of the crypto assets you store on that platform. Others will only give you 40%. Predictably enough, bitcoin and ethereum are the most popular coins used for loans.
You may have to repay the loan in a week, a few months or even a few years. The interest rate generally falls within the range of 0% to 14%.
How to get crypto loan?
To get fiat cash to lend your crypto, stick to this plan:
- Find a Reputable Lender
- Make sure it accepts the crypto assets you give as collateral
- Go through its eligibility requirements, application process and terms and conditions carefully
- Sign up for a lending platform
- Verify your identity and crypto holdings
- Select the loan type, terms and amount
- submit your request
- wait for approval
Most likely, a credit check will not be required – but you may need to open a wallet with your collateral on the lender’s website. Or, they may ask you to use a specific third-party wallet, such as Vexel.
Crypto lenders usually accept requests very quickly. The fastest people do it in seconds and transfer money to their customers within 24 hours. Many lenders provide users with handy calculators so that they can estimate the amount they will need to return.
How to use crypto loan?
Crypto loans are considered personal loans. The lender will not ask you why you need the cash. Feel free to use these funds to start a business, pay for your kids’ education, buy a home or refinance any other debt.
Some lenders will give you a loan in fiat currency. Others will transfer you stablecoins that are pegged to fiat currency or gold. Furthermore, selected lenders will only give you crypto whose price can be volatile like 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 their assets will increase 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 abbreviation stands for Centralized Finance. These are custodial crypto loans, which are the most popular type. They mean that you give the lender full control over your crypto until you pay off the debt.
The acronym DeFi stands for Decentralized Finance. Such loans rely on smart contracts. You are the only person who controls your crypto savings. But if you miss a payment or violate the terms of your contract in any other way, action will be taken against you automatically. DeFi crypto loans can have 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 could go bankrupt or get hacked. If this happens, you may fail to get your money back anytime.
The second risk is associated with the volatility of the crypto market. If the property you use as collateral drops in value, the lender may ask you to provide them with more coinsurance. If you fail to do so, they may liquidate your assets. Some lenders automate the process of raising the sum of the collateral.
In addition, you may lose your savings if you miss a payment.
To minimize the risks, you should do a thorough research of the market to find out the best lender. Check out its security protocols and read its customer reviews.
final thoughts
Hopefully, you found this article informative and now you have a better understanding of the essence of crypto loans. On the one hand, this is your chance to get instant cash without selling your cryptocurrencies. This is great if you think that the value of the property you give will increase in the future. On the other hand, if you fail to pay your loan or the lender gets hacked, you run the risk of losing all your crypto.
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