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In the last few years, cryptocurrency has morphed from little more than a novelty to a viable investment. And as people continue to pile on, new and exciting uses for digital assets have come into play. That’s right: we’re talking about crypto loans.
Crypto loans often come with features like same-day funding, low-interest rates, and zero credit check. But because crypto isn’t a stable asset, it’s uniquely risky as investment-based collateral goes. As such, it’s crucial to weigh the pros and cons carefully before signing on the dotted line.
What Is a Crypto Loan?
Crypto lending is similar to traditional secured lending. With a crypto loan, you pledge your currency as collateral to secure financing. In return, you receive capital – such as cash, stablecoins, or another cryptocurrency – that you’ll repay in installments. Plus, interest, of course. If you fail to repay your loan, the lender will seize your cryptocurrency to cover their debts.
How Do Crypto Collateral Loans Work?
Crypto loans generally aren’t offered by banks. Instead, you’ll have to find a crypto exchange or online lending marketplace that caters to the crypto community. Many lenders are actually individual investors willing to front the cash for crypto collateral.
Note that platforms may place restrictions on which currencies they accept. As a rule, the more obscure an asset, the less likely you can use it as collateral. If you typically invest in niche currencies, you may first have to trade to a more well-known option like Bitcoin before getting a crypto loan.
To get started with a crypto loan, you’ll have to sign up for a viable platform. Most have you input your loan requirements and calculate how much collateral you’ll need to qualify for the amount. Then, you deposit your crypto, apply for your loan, and receive your money.
Most platforms allow you to borrow at least 50% of your digital asset balance. Some permit you to borrow up to 90% of your portfolio’s value. But this comes with a risk: because your loan is tied to your currency’s value, if the price drops, you risk losing your asset.
Benefits of Using a Crypto Loan
#1. Low-Interest Rates
Many platforms offer low-interest rates for crypto loans (often under 10%). As such, you may secure a better interest rate for your crypto than other types of assets.
#2. No Credit Check
The majority of crypto lenders don’t perform a credit check on borrowers, making them a viable alternative to bad credit loans.
#3. Wicked Fast Funding Times
Many lenders can approve and fund a crypto loan in just a few hours, depending on the platform.
#4. Greater Flexibility
Depending on your portfolio and the platform, you may be able to transform your crypto into several currencies, including the U.S. dollar, stablecoins, or other cryptos. And unless forbidden by the lender, you can usually use the funds for any (legal) purpose.
#5. Asset Value = Loan Amount
Your loan amount is based on the value of your assets, not your income or credit score. That means you may get a bigger chunk of change for the collateral you put up. (Depending on the platform’s asset value-to-loan ratio.)
What Are the Risks of Using a Crypto Loan? Beware the Downsides
#1. Brutal Margin Calls
Cryptocurrency’s price is nowhere near as stable as most major currencies or even traditional collateral like vehicles or real estate. As such, its risk profile is more in line with other investment-backed loans, such as stocks.
To counter this risk, crypto lenders retain the right to issue margin calls. If your collateral’s value drops overnight, the lender may require you to front more currency to meet your minimum collateral requirements. In other words, crypto’s inherent instability multiples the risk of losing your asset when the market moves.
#2. High Minimum Loan Amounts
Crypto loans are known for their low APRs and flexibility – and high minimum loan amounts. It’s not uncommon to see reputable lenders setting their bottom dollar between $5,000 to $10,000. For platforms that lend 50% of your portfolio value, that means fronting $10,000 to $20,000 in collateral.
#3. Short Repayment Terms
Traditional personal loans generally have repayment terms ranging from 1-7 years. But since crypto loans operate out of decentralized platforms with private backing, they can set their own terms. It’s not uncommon to see repayment terms clock in at under a year. Paired with high minimum loan amounts, you may struggle to find an investor willing to give you the loan you need on a payment schedule you can afford.
#4. You Can’t Access Your Digital Assets
As long as your loan balance remains, you’re not allowed to access your collateral. That may present a problem if the price drops quickly, or you need to cash out. In fact, if the price drops, you’ll probably have to increase your crypto holdings or buy out your loan immediately.
#5. Not All Cryptocurrencies Are Eligible for Crypto Loans
Depending on your preferred lending platform, you may find that your crypto investments aren’t eligible for use as collateral. And rarer cryptos may not be eligible for loans on any reputable platform. Unfortunately, that means you’ll have to turn your coins into a more widely accepted asset (or find a loan elsewhere).
Safer Alternatives to Crypto Loans
#1. Traditional Personal Loan
Traditional personal loans use criteria like your income, debts, credit score, and collateral value to determine your eligibility and interest rate, which may range as high as 36% APR. Most cap their maximum amounts around $50,000 or less, while some offer loans up to $100,000.
>> More: Best Personal Loans
#2. Small Personal Loans
Many banks and online lenders offer small personal loans – under $2,000 – to borrowers across the credit spectrum. That said, even such small amounts may generate higher interest rates than you’d expect based on your income and credit profile.
#3. Credit Union Loans
Credit unions are known for charging lower rates and being more flexible than larger banks. For borrowers, that can translate to increased savings and better loan terms. If you’re already a member, they may even consider your personal banking history in their calculations.
#4. Borrow Money from a Friend or Family
Mixing business and family can be risky – but if you’re a responsible person willing to adhere to a contract, borrowing from friends and familycan work out. For some people, it’s a safer alternative than cashing in on a highly volatile asset!
#5. 0% Interest Credit Card
0% interest credit cards can offer free financing on new purchases or balance transfers for up to 21 months. Though the interest rate goes up after that period, they can be an effective way to finance large purchases without adding interest costs. (Just don’t miss a payment!)
Are Crypto Loans Safe?
Crypto loans may be riskier than other types of loans due to the potential for marketplace hacks and price fluctuations. Even if you go through a reputable lender, there’s no guarantee that the market value of your digital assets will hold throughout your loan.
When Does It Make Sense to Use a Crypto Loan?
Unless you can afford to take a loss or front more capital during volatile markets, crypto loans don’t make sense for regular investors. But there are exceptions to the rule.
For instance, a crypto loan can make sense when you need to liquidate your crypto without paying taxes. For example, if your crypto balance could cover large purchases, start a business, or make much-needed home improvements. And because they come with lower-than-average interest rates, you may pay less to borrow your own money than you’d pay in taxes. Not to mention, when it’s over, you get to keep your coins.
Crypto loans also make sense if you have poor credit but need a low-interest loan. However, if you’re already in dire straits, fronting a volatile asset can introduce additional risk into your financial situation.
Bottom Line: Crypto Loans
If you need capital and don’t want to fork over tangible assets, securing a loan with crypto is a viable alternative. But despite their flexibility and low cost, they come with higher-than-average risks due to their volatility. For many people, other personal, secured, or revolving loans may prove less risky.