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How does crypto lending work?

how does crypto lending work

Crypto lending works by allowing investors to lend out their crypto holdings to borrowers. Borrowers are able to get upfront funding through a crypto lending platform, and investors can earn crypto interest. 

In this article, we’ll go over the ins and outs of crypto loans and how to find crypto lenders.

What Is Crypto?

Cryptocurrencies are a type of digital currency that people can use essentially the same way as they would physical money. Crypto and cryptocurrency lending is quickly becoming one of the most popular ways people can utilize, exchange, or request funds. Approximately 16% of people in the U.S. have been involved in crypto transactions.1 

That comes out to about 40 million people who have:

  • Invested in crypto assets or crypto lending.
  • Traded via crypto lending platforms.
  • Have used crypto loans or cryptocurrencies. 

If you are looking to learn more about how crypto lending works, you’ve come to the right place! Keep reading for all the information you need to know about digital assets and crypto loans. 

What Is a Crypto Loan, and How Does It Work?

Crypto loans, also referred to as crypto-backed loans, are a type of funding that uses cryptocurrency as collateral. Collateral is an asset with equity that secures a loan exchange. A crypto loan is not the only type of secured loan that exists. Car title loans, auto loans, and mortgage loans are other types of popular secured loans

Since crypto loans use the crypto holders’ assets as collateral, it’s essential that borrowers have their own cryptocurrency in order to apply. Typically, borrowers can request loan funding for up to 50% of their entire crypto asset collection. That means if you had $100,000 in cryptocurrency, you would be able to request loan funding for up to an additional $50,000. Some crypto lenders allow borrowers to request up to 90% of their total crypto assets. 

Crypto loans work essentially the same way as other traditional loans in that borrowers must apply, receive approval, accept their terms, and sign a contract before they may receive money. 

What Are Crypto Assets and Decentralized Finance?

A crypto asset is a virtual capital with recognized equity. Crypto coins are an example of a crypto asset. To fully understand crypto assets, it is important first to know the difference between centralized and decentralized platforms for lending. 

A centralized lending platform, also called centralized finance, is when funds are exchanged with the assistance of an established cryptocurrency institution. Decentralized lending platforms, also called decentralized finance, are when funds are exchanged on a peer-to-peer basis using smart contracts. This platform type cuts out financial institutions that may act as middlemen, like banks or credit unions. 

If you are new to crypto lending, you may want to stick with an established company to minimize your financial risk. Some popular organizations that lend crypto are: 

CryptocurrencyAbbreviationDescription
BitcoinBTCPioneer and most widely recognized cryptocurrency.
BlockFiFinancial services platform, not a standalone cryptocurrency.
EthereumETHBlockchain platform enabling smart contracts and decentralized applications.
TetherUSDTStablecoin pegged to the value of the US Dollar.
XRPXRPDigital currency for fast, low-cost international money transfers.
TerraLUNABlockchain platform supporting stablecoins and decentralized finance (DeFi) applications.

What Are the Pros and Cons of Crypto Lending Platforms?

What are the pros and cons of the crypto market? Before you commit to any crypto lending platform, consider the possible benefits and disadvantages. 

Below are some of the pros or benefits of utilizing crypto lending platforms. 

Crypto Loans Are Versatile

Borrowers can usually receive their loan funding in the form of either cryptocurrency or U.S. dollars. Most other traditional loans only offer financing in the form of U.S. dollars. Keep in mind that if you choose to receive your crypto loan in the form of cryptocurrency, you are limited to purchasing only items that accept this form of funding. On the other hand, U.S. dollars may be used to buy just about anything. 

Low-Interest Rates

You may also find lower interest payments with crypto lending platforms. Since crypto loans are secured, lenders are usually willing to offer lower crypto lending rates. 

No Credit Check

Another great benefit of crypto lending is that there usually aren’t any credit checks. For many, the thought of having to go through a credit check is enough to deter people from applying for a loan. With crypto lending, you don’t have to worry about a less-than-perfect FICO score holding you back from finding quick approval! 

Fast Funding

The crypto lending process is also extremely fast and efficient. Sometimes, borrowers are able to access their loan funds within minutes after applying! 

Keep Your Physical Property

Since the collateral required for crypto lending is a digital currency, borrowers don’t have to worry about losing their physical property. 

While there are many amazing benefits that go along with crypto lending, there are also a few cons or disadvantages everyone should be aware of. 

Strict Requirements

Unlike installment loans and other convenient forms of funding, crypto lending can come with extremely strict requirements. For example, some lenders only offer loan amounts starting at $10,000, which means a borrower would need to have at least $20,000 in cryptocurrency in order to qualify for a loan.  

Short Loan Terms

The loan repayment terms on crypto lending can also be extremely brief. If you don’t think you would be able to repay your entire loan within a short amount of time, crypto loans may not be the right choice for you. Instead, you may want to look into other convenient forms of long-term funding, like a personal installment loan. 

The Risk of Crypto Asset Decreasing 

Crypto borrowers also run the risk of their cryptocurrency decreasing in value during the terms of their loan. If your cryptocurrency decreases in value enough, you may find yourself owing money at the end of your loan! 

Alternatives to Crypto Lending Platforms

While a crypto lending platform may seem convenient, it may not always be the best option. If a crypto loan doesn’t go well, borrowers may be left with increased debt or significantly decreased credit scores. It is vital for borrowers to build and maintain a high credit score, who want to receive lower interest rates, flexible terms, or a higher loan amount on financial endeavors in the future. 

If you need money but don’t think crypto lending is right for you, try these other options and financial products. 

Sell Your Crypto 

Consider a crypto exchange instead of getting a crypto loan. If you find that your cryptocurrency doesn’t really benefit your financial situation, you may want to think about selling it. Before selling, do your own research to learn about the best times to sell. 

Personal Installment Loans

You may also find that personal installment loans work better for you than a crypto loan. A personal loan is a type of funding distributed in one lump sum and then paid back by the borrower in fixed monthly installments. Installment loans are offered by most traditional financial institutions. With the right lender, you can get competitive interest rates and personalized loan terms. You may even find that installment loans have the ability to improve a bad credit score

Secured Personal Loans

Another loan alternative to crypto lending is secured personal loans. Similar to a crypto loan, a secured personal loan also uses collateral to lock down the funding. Some common types of secured loans are car title loans and mortgages. 

A car title loan is funding that requires the borrower to use their vehicle title as collateral. When approved for a title loan, the lender will sign onto the borrower’s vehicle title as a lienholder, giving them partial ownership of the car. While borrowers are able to keep and drive their vehicle like normal while they pay back their title loan, they run the risk of completely losing their vehicle should they default. 

A mortgage is another type of secured loan that helps people purchase a home. Unlike car title loans, which can be used for virtually anything, mortgages are meant strictly for buying property. So, if you are looking to pay for something other than a home, a mortgage may not be the right financial product for you. 

Online Payday Loan

Payday loans are a type of funding meant to help people get some extra cash while they are in between paychecks. Typically, payday loan organizations offer a minimum loan amount and expect borrowers to pay back their loans within about fourteen days or less. Unlike crypto lending, payday loans almost always come with an extremely high interest rate. Borrowers who don’t pay back their entire payday loan within the short two-week period may see their balance go up each month due to the increased interest charges.  

Bank or Credit Union Loans

If you have an ideal credit score, you may consider getting a loan from retail banks or credit unions. Banks are notoriously strict lenders and typically only offer loan amounts to people with high credit scores and a strong credit history. While credit unions may offer loans to people with varying scores, they also have strict requirements of their own. Many credit unions only extend loan funding to people who live within a particular area or meet specific financial requirements. 

Credit Card Cash Advances 

Another way to get fast cash is to utilize a cash advance on your credit card. However, keep in mind that cash advance interest rates are higher than rates charged on regular credit card purchases. So, before you take out a cash advance, ask yourself if you would be better off just 

making the purchase directly with your credit card. 

FAQS: How Does Crypto Lending Work?

Can I use crypto lending if I am new to cryptocurrencies?

Yes, even newcomers to cryptocurrencies can use these lending platforms. However, it’s advisable to start with a centralized crypto lending platform, as they often provide more structured support and minimize financial risks for beginners.

How quickly can I access funds from a crypto loan?

The process of obtaining funds from most crypto loans is generally fast. On many lending platforms, borrowers can access their loan funds within minutes after their application is approved.

Are there any tax implications for crypto lending?

Yes, engaging in transactions on these platforms can have tax implications, as cryptocurrency transactions may be subject to capital gains tax. Consulting with a tax professional is recommended for specific guidance.

What happens if the value of my crypto collateral falls significantly?

In the event that your collateral significantly decreases in value, you may owe more than the original loan amount. This risk is an important consideration when using crypto as collateral on lending platforms.

Can I repay my crypto loan early, and are there any penalties for doing so?

The terms for early repayment of a crypto backed loan vary across lending platforms. Some platforms may permit early repayment without penalties, while others might impose fees.

How does the interest rate on one of these loans compare to traditional loans?

Interest rates on these loans, especially those from decentralized crypto platforms, can be more competitive than traditional loans. However, rates can vary significantly based on the lending platform and the overall crypto lending market conditions.

Is it possible to increase the loan amount after the initial agreement?

Increasing the crypto loan amount after the initial agreement may be possible on some platforms, but it usually requires additional crypto collateral and is subject to the platform’s terms and conditions.

What are the differences between decentralized and centralized crypto platforms?

A decentralized crypto lending platform operates without a central authority and often offers more flexible terms, while a centralized crypto lending platform is managed by a company that oversees the loan process, potentially offering more security and structured services.

What types of cryptocurrencies can be used as collateral on crypto lending platforms?

Most crypto platforms accept popular cryptocurrencies like Bitcoin and Ethereum as crypto collateral, but the range of accepted currencies can vary depending on the platform’s policies.

Is a crypto backed loan available globally, or are there regional restrictions?

The availability of crypto backed loans can vary by region. Some loan platforms operate globally, while others may have geographical restrictions due to regulatory differences.

A Final Summary of Crypto Lending From CreditNinja 

Now that you know the basics of crypto lending, you may be looking for other helpful financial tips. Check out the CreditNinja financial blog if you want to know how to come up with money fast, how to save money during the holidays, or how to live without a job

References:

  1. Development of Digital Assets │ The White House
  2. What Is Crypto Lending and How Does It Work? │ Experian

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