Before jumping right to crypto loan requirements, let’s first take a look at what crypto lending is.
According to Stilt, “Crypto lending refers to a type of Decentralized Finance that allows investors to lend their cryptocurrencies to different borrowers. This way, they will get interest payments in exchange, also called “crypto dividends”.
A third party connects borrows and lenders, with lenders being the first party; the crypto lending platform is the second party; and the borrower is the third party.
How do crypto loans work?
Prior to securing a loan, research lending platforms and find a reputable and trustworthy one. There are few steps to the lending process, including:
- The borrower uses the lending platform to request a loan.
- The collateral is staked as soon as the loan is accepted by the platform. The borrower may not retrieve the stakes until the he is able to fund back the entire loan.
- Lenders then automatically fund the loan through the platform, which is hidden from investors.
- Investors receive regular interests as payments.
- When the borrower pays off the loan in full, he will receive the crypto collateral requested.
Pros and Cons of Crypto Loans
There are several cons to engaging in the crypto loan process, such as:
- The risk that if prices fall you may have to pledge more.
- They are not normal, stable assets that you’re borrowing.
- If the value of your pledged crypto declines below a threshold set by the lender, then you have a limited period of time to pledge additional crypto.
- Crypto loans are also not federally insured. So, if you lose your funds in a security breach, for example, compensation isn’t guaranteed.
However, there are some benefits too. Like these:
- It easier to secure than traditional loans.
- They have a low loan-to-value (LTV) ratio, which is based on the amount of the loan and collateral you offer. For example, if you offer $10,000 in crypto as collateral and the loan you want is $5,000, the LTV is 50%.
- If you have a lot of crypto that you want to liquidate without selling or having to pay taxes on it this could be a good option.
- Funds may be used to purchase or invest in a business, similar to a personal loan.
Alternatives to Crypto Loans
As existing as crypto might sound, there are some alternatives to consider before using that loan method. For instance:
- A home equity line of credits where you can potentially borrow up to 85% of the home’s value. The flip side is if you don’t repay it, you could lose your home.
- A zero-percent-interest credit card with free financing for a number of months. The pitfall is if you fail to repay it in full, you may be hit with a high interest rate on unpaid balances.
- Credit union loans often have flexible and attractive terms and rates. But you have to be a member to qualify.
- A personal loan that’s less than $2,000 could also work. The rates might be high depending on your credit profile and income.According to Bankrate, “Crypto loans can be inexpensive and fast, and they often don’t require a credit check.”Before requesting a loan, understand the risks, especially what could happen if the value drops quickly and significantly. Think carefully about the pros and cons, as well as your other options before making a decision. Give me a call if you need help or have any questions.
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