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Cryptocurrency has become a popular investment option over the past decade. But you couldn’t withdraw your crypto until you sold it. Then crypto lending hit the scene.
Crypto loans allow you to use your cryptocurrency as collateral to borrow money. these secured loans usually have low interest rates and no credit check requirements. Although they sound incredible in theory, there is considerable risk if your crypto loses value.
If you don’t want to risk your cryptocurrency but need cash, you can consider a personal loan, which is usually unsecured and low risk. With Credible, you can compare personal loan rates from multiple lenders in minutes, without affecting your credit.
What is a crypto loan?
Crypto loans are secured loans that use cryptocurrency as a guarantee. These loans work the same way as a mortgage or car loan, except your cryptocurrency secures the loan instead of your house or car.
You can get a crypto loan for cash or stablecoin, depending on the lender. Stablecoin is a type of cryptocurrency whose value is tied to a real-world asset, such as gold or the US dollar.
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How do crypto loans work?
You can apply for a crypto loan at BlockFi, Celsius, Coinbase, and other cryptocurrency exchanges. When you apply for a crypto loan, you choose your payment option (USD or a stablecoin if available) and put your cryptocurrency as collateral.
You don’t have to worry about credit checks for qualify for a loan since you have provided guarantees to secure it. Crypto loans usually have low interest rates. They also come with shorter repayment terms than other types of loans, often 12 months or less.
If you are approved for a crypto loan, funding can happen quickly, sometimes as early as the same day, with funds deposited into a digital wallet of your choice or your bank account. Stablecoin lending transactions can happen even faster, sometimes within minutes.
Lenders may charge origination fees to cover the processing of your loan application. In many cases, the amount you can borrow depends on the total amount of cryptocurrency you have.
You will make monthly interest and principal payments, in cash or cryptocurrency, depending on the lender. Once you repay the loan, your cryptocurrency is returned to you.
If you don’t want to tie up your crypto assets, consider a personal loan – in most cases, they don’t require collateral. Credible, it’s easy to compare personal loan interest rates from several lenders.
Crypto Lending Risks
Crypto loans carry some risk for borrowers. The price of cryptocurrency changes regularly, sometimes with wild fluctuations. If the value of your cryptocurrency drops significantly, it could lead to what is known as a margin call.
In this case, you will need to provide more crypto as collateral to maintain a healthy loan-to-value ratio. Your LTV is the ratio of the loan amount to the value of your cryptocurrency collateral.
When you take out a crypto loan, you agree on a maximum LTV ratio with the lender. When your crypto value drops, it increases your LTV ratio. The only way to lower the ratio is to add more crypto funds to your collateral.
Another problem with tying your cryptocurrency to a loan is that it becomes unavailable if you want to sell or trade. You will no longer have access to these funds until the loan has been repaid.
Although taking out a crypto loan is risky, it could be advantageous in certain situations. When you sell cryptocurrency, you may have to pay taxes on the gains made. Taking out a crypto loan for cash allows you to withdraw money from your crypto account without any tax consequences.
A crypto loan is also an option if you want to make a larger purchase somewhere that does not accept cryptocurrency as payment. It’s also a way to quickly access funds without a credit check and at a lower interest rate than many other financing options.
Crypto loans can also be a simpler alternative to traditional borrowing if you need a large amount of cash quickly. You may have difficulty qualifying for a $50,000 personal loanfor example, but if you have at least $100,000 in cryptocurrency, you can probably get a crypto loan.
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Advantages and disadvantages of crypto loans
Cryptocurrency is a hot investment right now, and like any investment, it can be volatile. Due to this volatility, crypto loans have some important pros and cons to consider:
- Quick funding
- No credit check
- Low interest rates
- No tax consequences
- High risk borrowing
- Some lenders charge origination fees
- You cannot sell or trade your collateral cryptocurrency until the loan is repaid
- Cryptocurrency is not federally insured
Cryptocurrency can be a high-risk investment, so it’s important to weigh all the potential pros and cons of a crypto loan before pursuing one.
If a crypto loan doesn’t meet your needs, consider these less risky funding options:
- Personal loan – If you have good credit, you may qualify for a low interest rate on a Personal loan.
- Refinancing by collection — Cash refinancing of your mortgage might be a better choice if you have enough equity in your home.
- Home equity line of credit — If you have accumulated equity in your home, a home equity line of credit (HELOC) can be a safer way to access money. A HELOC is a revolving line of credit that lets you borrow money against the equity in your home.
You can get an idea of the cost of a personal loan using a personal loan calculator. And you can easily compare your prequalified personal loan rates from several lenders with Credible.