When you take a loan and use your crypto as collateral, that’s called a crypto-backed loan. With these loans against crypto, you can unlock the value of your crypto holdings without actually selling the crypto. This provides several benefits, not least of which is getting the cash you need while still holding onto your crypto. Crypto lending is often done through decentralized finance lending apps. If you want to learn more about how crypto-backed loans work, and if they’re right for you, keep reading.
What are loans backed by cryptocurrency?
A crypto-backed loan uses your cryptocurrencies as the collateral for the loan. Depending on the lender, you can get anywhere from 20% to 70% of the value of the cryptocurrency used as collateral. This is known as the “Loan-to-Value”. It’s calculated as the ratio between the crypto credit amount in USD and the value of the collateral in USD, expressed as a percentage. The lender requires a minimum LTV, and if the value of the crypto used as collateral drops, you may be required to add more collateral. Taking a loan against crypto allows the crypto holder to raise cash without selling their crypto, providing benefits such as:
- Make a major purchase
- Buy more crypto
- Invest in your business
- Optimize your taxes
Which cryptocurrencies are valid for loans?
There are thousands of cryptocurrencies, and you can’t use them all as collateral for crypto loans. The cryptocurrencies that are valid for loans are determined by the lending platform. You can expect to see Bitcoin and Ethereum as valid cryptocurrencies for collateral. Many stable coins, such as US Dollar Coin (USDC) and Tether (USDT), are valid. To find out which cryptocurrencies are valid for loans backed by crypto, you’ll need to check with the lending platform.
Do crypto loans require credit checks?
One benefit of using a crypto-backed loan is the lack of credit checks. Unlike traditional lenders like banks and credit card companies, no credit checks are involved with crypto loans. That means you can often get instant approval, and there is no impact on your credit score.
How long does it take to receive funds with a crypto loan?
As mentioned above, approval for crypto loans is often instant, and the distribution of your loan proceeds will take under 24 hours. Compare this with the typical process when securing personal loans from a traditional lender. Online lenders can take up to five days to fund your loan, while banks and credit unions might take as long as seven business days. And that’s after the loan approval process, which could also take up to seven days.
How does crypto lending work?
If you already own some valid cryptocurrencies, securing a loan using those crypto assets as collateral is relatively straightforward. First off, you’ll need to find a lender that will accept cryptocurrencies as collateral. Trying to get a loan from a lender who will ask, “What is a crypto loan” isn’t going to work. So instead, check out some of these crypto lending platforms:
BlockFi: BlockFi is the oldest lending platform, but it only accepts four different cryptocurrencies as collateral. The lender has been very transparent in focusing on institutions and high-net-worth individuals.
Nexo: Nexo allows for 39 cryptocurrencies as valid collateral options, and interest rates begin as low as 0% APR. It’s also possible to open a line of credit at Nexo, which can be quite convenient.
Celsius: Celsius is the newcomer in the space, but that’s not holding them back from amassing 1.7 million users as of April 2022. They also allow for 39 cryptocurrencies as valid collateral options and have loans starting as low as 1% APR.
No matter which platform you use, you can benefit from fast approvals, no credit checks, generous repayment terms, and no origination fees.
What are the pros of crypto loans?
There are several benefits to crypto-backed loans, but two of the most appreciated are the speed they offer. A crypto-backed loan can be approved immediately, with no credit check, and the funds are typically disbursed to the borrower in under 24 hours. Another massive benefit is cashing out some of the value in your cryptocurrency holdings without actually selling them. This avoids capital gains taxes, unlocks capital that can be used for other investments or large purchases, and can help with building wealth. Lenders who offer cryptocurrency-backed loans offer flexible terms as well. Borrowers can customize their loan terms and lower the APR paid by using smaller loan-to-value amounts.
What are the cons of crypto loans?
Of course, borrowers should also be aware of the potential pitfalls in using cryptocurrency loans. For example, they say that using a personal loan to invest in cryptocurrencies is risky business, and this is also true if you’re using crypto as collateral. Another potential downside to using crypto as collateral is that the volatility of cryptocurrency prices could get you into trouble. Crypto lenders require borrowers to maintain a specific loan-to-value (LTV). A drop in the price of your cryptocurrency could create a margin call where you need to top up your collateral balance to maintain the appropriate LTV. If you’re unable to add to your collateral, the lender could liquidate your crypto to pay the loan.
The best loans are the ones that work for you. If you’re holding some cryptocurrency in your portfolio, it could make sense to unlock some of that value with a crypto-backed loan. You can use the proceeds to increase your crypto holdings, to invest in your business, or for anything you might be considering. Crypto lenders don’t care what the loan is for; they are happy to lend to anyone with the necessary crypto collateral.