Cryptocurrencies can be viewed as a distinct asset class. And, like other assets such as a stock, house, or car, your crypto can be used as collateralized loan crypto. Today, you can get a crypto loan from one of several new lenders, with the collateral being your existing cryptocurrency. Before obtaining a loan, you must hold cryptocurrency.
These loans feature cash availability, same-day funding, cheap interest rates, and no credit checks. The drawback? You may be required to pledge additional cryptocurrency if the coin’s net value declines. A lender may initiate direct debits or liquidate your cryptocurrency account if you fail to make a payment.
Even though there are challenges, a crypto loan can be a lifesaver if you need funds for transactions but don’t want to sell your crypto.
What are crypto loans?
A crypto loan is a secured loan wherein your crypto assets are employed as collateral to obtain liquidity from a lender, which you would repay in installments. Cryptocurrency is returned at the end of the loan term if all payments have been made and the loan amount has been compensated in whole.
The amount of your cryptocurrency loan will often be determined by the LTV (loan-to-value) ratio of the digital currency you use as collateral. You can borrow up to 50% to 90% of the value of your cryptocurrency from lenders. Bitcoin and Ethereum are the most prominent cryptocurrencies accepted as collateral by some lenders, while others accept more than 40 altcoins.
The duration of a loan might range from a week to a year or longer. Interest rates are modest relative to personal loans and credit cards, as lenders offer rates ranging from 0% to 13.9%.
Crypto loans appeal to holders who anticipate their crypto assets’ long-term worth will rise yet require cash for immediate spending. However, crypto loans have inherent hazards, such as the need for more security if the worth of your cryptocurrency falls and steep fines for missing payments.
Types of crypto loans
Crypto loans can be classified into two types: CeFi and DeFi.
- The first type is the Centralized Finance or CeFi loan. These are custodial cryptocurrency loans in which a lender retains control of your cryptocurrency during the payback period. CeFi is the umbrella under which most crypto loans fall.
- Decentralized Finance, or DeFi, loans use smart contracts to assure loan compliance. You retain ownership of your crypto assets, but a lender may take automated action against your account if you fail or skip a payment. DeFi crypto loans may have a higher interest rate than CeFi crypto loans.
What can a crypto loan be used for?
Like a personal loan, a crypto loan can be utilized at your discretion and typically without limits from the lender. The loan proceeds can be used for substantial expenses such as a down payment on a house, a car, tuition, debt consolidation, or starting a new business.
A crypto loan might make logical sense if a person has a significant amount of cryptocurrency and needs liquidity without being obligated to sell.