Everything you need to know about crypto loans
Crypto loans are collateralized loans which are given to a borrower in exchange for crypto assets as collateral. These kinds of loans work like regular loans, but without the need for a middleman, such as a bank or financial intermediary.
How do they work?
Firstly, both the lender and borrower agree on the interest rate of the loan. As a borrower, you can obtain a traditional currency loan in exchange for your crypto assets, which are used as collateral. This means that your crypto will act as security in the event of a failed repayment. Conversely, you can also borrow crypto assets and use traditional currency as collateral.
Once the interest rate is agreed and the loan is approved, the amount is deposited into your bank account. Much like with a traditional loan, you’ll then pay equated monthly instalments (EMI) to the lender and receive your collateral back once the loan is paid off.
You can also take out a “flash loan”, which runs on the Ethereum network. As the name suggests, you can get a loan instantly and without the need for collateral. However, as you won’t be providing collateral, you’ll have to pay back the money quickly and in a single transaction.
How do you take out a crypto loan?
You can take out a crypto loan through DeFi lending platforms. AAVE, Compound and dYdX are popular platforms that use smart contract protocols to automate loan pay-outs. DeFi lending platforms are also completely decentralised and available to anyone.
To apply for a crypto loan, all you have to do is apply and send the crypto assets you want to use as collateral to a certain wallet. You can apply for a loan of any size, and you’ll have a variety of currencies to take out, including traditional currency, stablecoins or cryptocurrency.
Why do people take out crypto loans?
Crypto loans are taken out because it’s a good way to receive liquidity without the need to sell your cryptocurrency assets. Instead, it is used as collateral on the loan you want to take out. Some choose this approach instead of selling because they may expect the value of their crypto assets to increase. That, or they want to hold it long enough to avoid short-term capital gains tax.
How can you benefit from crypto loans?
Crypto loans are more accessible, faster, more flexible and offer low transaction fees.
Applying for a traditional loan can be quite a lengthy process, and there are many hoops to jump through before your loan is even approved. For example, you may need to provide information such as your credit score, credit history, proof of employment and more. It can also be difficult for those who are unemployed or have a poor credit score to get a loan approved at all.
With crypto loans, credit score information is not required. It also helps those who do not own a bank account. According to The Global Findex Database, as of 2017, there are currently 1.7 billion unbanked adults worldwide. There are several crypto lending platforms that don’t require a bank account, thus creating accessibility to those who may not be able to access traditional banking services.
Waiting time for approval can also be slow with traditional loans, which often take days, if not weeks, to be approved. However, crypto loans can be approved in just 24 hours and don’t require the same amount of paperwork as a traditional loan. Platforms that use a peer-to-peer (P2P) network tend to take a bit longer, however, as cooperation between lender and borrower is required.
Crypto loans certainly offer an easier, quicker and more accessible way to take out a loan. As crypto continues to grow in popularity and move towards worldwide adoption, crypto loans could become revolutionary in offering an alternative approach to lending and borrowing.