Crypto Loans: How Does Crypto Lending Work?

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Cryptocurrencies have many uses beyond trading. They may even function as collateral for loans! This form of lending has gained traction and can now be found on many popular exchanges. What are the advantages of crypto loans over conventional banking services?

Using cryptocurrencies as collateral, you can borrow money online. Like ordinary loans, these arrangements include a payment schedule, and the amount depends on the value of the coins. You pledge your assets, get the loan and pay it back over a predetermined period. Defaulting causes liquidation of your collateral. This is where the similarities between crypto and conventional lending end.

How Secured Crypto Loans Work

So, where can you borrow money against your coins? Choose between crypto exchanges and platforms that specialize in these services. Check this crypto loans comparison for the best rates and conditions. Before registering, make sure the platform is legit and has a positive reputation.

When you pledge your coins, the ownership is not relinquished. However, you may no longer trade the assets or use them for payments. Essentially, your coins are frozen until you pay the debt in full.

Unlike collateral for a fiat loan (for example, a home or a vehicle), cryptocurrencies may lose or gain value rapidly. If the assets suddenly depreciate, you will need to provide more collateral to sustain the required proportion. This is the main caveat. Nevertheless, the system has plenty of benefits for cryptocurrency holders.

Overview of Benefits

Would you like to hold on to your cryptocurrencies rather than trade them? Crypto loans come in handy, as you can secure capital without relinquishing your assets. Once the loan is repaid, you get them back. Generally, the conditions are more favorable than ordinary loan agreements. Consider the following differences:

  • The interest rates are lower than for personal loans or credit cards (under 10%).
  • The more valuable your collateral, the larger the loan. Generally, users can borrow between 50% and 90% of their portfolio value.
  • Borrow cryptocurrencies or fiat like the US dollar.
  • These loans do not require credit checks, which makes them more accessible (you can get a loan without credit history or with a low score).
  • Get your loan in just a few hours.
  • Lenders also benefit, as they earn attractive APY (up to 10%). The yield is better than on a savings account.

LTV and Volatility

The loan-to-value ratio determines the amount of collateral required. For example, if you want to borrow $5,000 at the LTV of 50%, your collateral must be worth $10,000. If it depreciates in the future, the LTV will drop, and a margin call may be triggered. Once a certain threshold is exceeded, you will have to provide more collateral to maintain the loan.

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To Sum Up

Crypto loans offer many advantages in comparison with conventional bank agreements. They are more accessible, faster, and cheaper than ordinary loans. At the same time, borrowers must understand how and why their LTV may change and choose only regulated platforms with a positive track record.