How does crypto lending work? 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. 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 mortgages 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 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:
- Ethereum (Ether)
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.
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 credit score holding you back from finding quick approval!
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.
Unlike personal 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.
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. Maintaining a healthy credit report is vital for borrowers 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 a personal installment loan works better for you than a crypto loan. A personal installment 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 could get competitive interest rates and personalized loan terms. You may even find that installment loans have the ability to boost your overall 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 loan 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 a retail bank or credit union. 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.
Those are the basics of crypto lending! Looking for other helpful financial tips about getting money? Check out the CreditNinja financial blog!