Crypto Loans: Everything You Need to Know
Crypto loans are becoming extremely popular among both, lenders as well as borrowers. While they provide lenders with a scope of earning passive income through their substantial amount of crypto assets, the borrowers can fulfill their loan requirements with crypto loans much more easily. Before they gain more popularity and you are left behind from enjoying the various perks of giving and taking crypto loans, let us help you with everything that you should know about crypto loans and how you can get one.
What are Crypto Loans?
Crypto loans refer to the loans which are obtained against or in the form of cryptocurrencies. There are specialized crypto lending platforms where lenders having a surplus amount of cryptocurrencies lend some of their assets to the lending platform. In return, they earn APY rewards depending on the number of assets they lent to the platform. The borrower comes to these platforms to obtain these loans in exchange for collateral and a borrowing fee.
How do Crypto Loans Work?
Crypto loans work in two ways. The borrower either borrows money by putting their crypto assets as collateral. In another way, the borrower can present their money as collateral to borrow cryptocurrencies. The collateral act as a security in the event of a failed repayment of the loan by the borrower. The borrower as well as the lender have to agree on the interest rates and the duration of the loan for the smart contracts to execute the disbursement of the loan to the borrower.
After that, the process looks much like a regular loan in which the loaned amount is credited to the bank account of the borrower. Then the borrower can pay equated monthly installments to repay the loan. Also, the borrower receives their collateralized assets once the loan is completely paid off to the lender. The entire process is controlled by smart contracts. This prevents either of the parties from backing down from their pre-agreed conditions.
Types of Crypto Loans
There are basically two types of crypto loans that the borrower can obtain. These are:
Flash loans allow you to take loans without having to show any collateral. In this, a top-level transaction is broken down into sub-transactions. The smart contracts control each level of the transaction, ensuring that the loan is paid back along with the interest. In case the borrower fails to pay back the loan, the transaction doesn’t get validated as a block. This indicates that the loan never happened.
In this, the borrower has to keep their crypto assets as collateral. The value of the collateral must match the value of the borrowed loan. This means that the loan-to-value ratio must be minimum. In case, the LTV ratio becomes high, the borrower may have to pay fines.
Why Should You Take a Loan Against Crypto?
You should take a loan against your crypto assets because the interest rates are much lower in the case of crypto loans as compared to personal loans obtained from banks or other financial institutions. In addition, crypto loans do not require any credit checks and flash loans do not even require your o present collateral. Therefore, people who are facing trouble getting a traditional loan can easily rely on a crypto loan to meet their capital requirements.
How Can You Get One?
You can get a crypto loan in five easy steps.
- Select the DeFi platform that you would like to use for obtaining the loan. There are numerous lending platforms like Aave, Compound, etc. which allow you to get loans based on your crypto assets.
- Secondly, you will need to sign up on the platform and verify your identity as well as your collateral assets.
- Thirdly, you need to select the cryptocurrencies that you want to borrow and the size of the loan you want.
- Next, you need to decide the length of time till when you want to keep the borrowed assets. Once you feel comfortable with all the details you have filled, you can go head with getting crypto loans.
- You will receive loan offers with varying interest rates and the amount of collateral required. You can select the loan offer that you are most interested in and start borrowing.
Crypto loans have many advantages, especially for those who face difficulty in obtaining loans from traditional lenders like banks. Some of these advantages are:
- Any person who is willing to present collateral or can guarantee the repayment of loans (in the case of flash loans) can obtain crypto loans. This makes it easier for borrowers to get loans with their crypto assets.
- Since smart contracts automate the process of lending and borrowing loans, the process is much smoother as compared to other modes of getting loans.
- Crypto loans are an easy way of earning passive income on your cryptocurrencies without having to do a lot of work. The lenders can simply deposit their assets in vaults or money lending platforms and earn APY rewards on their ability to lend money.
- The borrowers getting such loans have to pay a very low-interest rate. Also, there are no credit checks required for getting a crypto-secured loan.
- Crypto loans make it easier for people to get loans against their crypto assets without having to sell them. This allows the borrowers to witness an increase in the value of their crypto assets.
In addition to the several advantages of crypto loans, there are a few disadvantages as well. These are:
- As we all know the crypto prices are highly unstable, this can lead to the borrower having to put more assets as collateral in case the value of their assets drops, leading to liquidity.
- Since there are no regulations on such loans, the loss of money due to security breaches is not insured. Hence, if there are any problems in the smart contracts, the borrower can end up losing the loans as well as their collateralized assets.
- Diversification of your crypto portfolio by means of loans can be very risky. This is because it can lead to the addition of invaluable currencies to your portfolio.
Though these loans may look very tempting as there are no credit checks involved or necessary collaterals, there are many risks attached to them that the borrowers, as well as lenders, must be aware of. Also, while choosing the platform to lend or stake your assets, make sure you choose the right platform to do so.