If you are the proud owner of some cryptocurrency and want to learn more about its potential to alleviate your financial strains, you should look into Crypto lending. This is the process of using your Crypto as collateral to receive a Crypto-backed loan.
Once the loan is paid back, over time, the collateral is returned. We will break down the whys and how’s of this process and by the end of this brief guide, you should have a good understanding of why people engage with Crypto lending and how it works. Let’s get started.
What Is Cryptocurrency?
Before we dive into the hot topic of cryptocurrency lending, we should first make sure we understand the basic terms. A cryptocurrency (sometimes known as Crypto) is any form of currency that exists online (digitally or virtually) and uses cryptography to secure transactions. Cryptography is the process of encryption to protect data.
Cryptocurrencies don’t have a central issuing or regulating authority, instead, transactions are verified, and new units are issued by a decentralized system. Knowing how best to invest in Crypto is important, as the value of cryptocurrencies fluctuates constantly and can be very volatile. The most popular cryptocurrencies include Bitcoin, Ethereum, and Tether, but there are many to choose from.
What Is Crypto Lending?
Just as your house or car are assets that can be used as collateral to obtain a loan, so too can your Crypto. Essentially, borrowers use their digital assets (Crypto) as collateral, just like how a house is used as collateral for a mortgage, and the loan is provided with the understanding that it will be paid back in regular installments.
The benefits of these loans for borrowers include immediate access to cash, low interest rates, same-day funding, and no credit checks. However, the downside is that you may have to pledge more Crypto coins if their value falls, which can happen suddenly. Remember, Crypto is highly volatile. What’s more, you risk the lender liquidating your cryptocurrency if you miss a payment.
Cryptocurrency Interest Rates
Interest rates for Crypto loans are low compared to personal loans and credit cards, however, lately they have been on the rise. This is likely due to the increasing popularity of cryptocurrencies and the growing demand for loans.
Changing Crypto interest rates can be hard to keep track of, especially if you have several investments to manage. Remember, interest rates are constantly subject to change, so you should check daily to keep on top of the current situation.
Once you have chosen a lender based on current interest rates, you will need to bear in mind the conditions of the loan. For instance, the inherent risks of Crypto loans include the potential requirement of additional collateral if the value of your crypto goes down and high penalties for missed payments.
Why Do People Use Crypto To Get A Loan?
When other, more stable, assets like a house or stocks can be used as collateral to obtain a loan, you may be wondering why people engage with Crypto loans. Well, a crypto loan can make sense if the borrower holds a substantial amount of cryptocurrency and wants immediate liquidity without having to sell. If Crypto is their main asset, and the value seems to be on the rise, it can be a very sensible and reasonably safe option.
Moreover, like a personal loan, Crypto loans tend to come without restrictions from the lender. So, they can be used at the borrower’s discretion. This makes the prospect of a Crypto loan appealing, as it provides instant cash that can be used anywhere the borrower needs it. Provided loan repayments are made on time and the Crypto value does not drop, this is a solid option.
How Does Crypto Lending Work?
As we have seen, to get a crypto-backed loan, borrowers collateralize their crypto assets and then pay off the loan over time to get their collateral back. Loan terms can be anywhere from seven days to a year or more, and this will be agreed with the lender.
To get a crypto loan, you have to own some of the cryptocurrencies that are accepted for loans. You should check with your lender to see which coins are accepted and ensure you own the correct kind of Crypto.
You will then need to research reputable lenders and choose the one that works best for your needs. Each lender will have its own application process, so ensure that you read the eligibility requirements and terms and conditions carefully before committing.
Cryptocurrency lenders tend to provide a fast turnaround and can approve a loan request within 24 hours.
Be Aware Of Risks
Finally, before you finalize a loan agreement with a lender, ensure that you are aware of the potential risks and that you are making a well-researched decision. Identifying a trusted and secure lender is vital, especially when providing access to your personal information and valuable Crypto account.
Make sure to research online reviews of lenders and read their security protocols to find one you can trust. Do not forget that Crypto lenders tend not to have as much oversight as traditional banks, so cybercrime, hacking or lender bankruptcy are potential risks in the market. If you lose your digital funds in a security breach, compensation is not guaranteed.
This has been a brief and simple guide to understanding cryptocurrencies and specifically the process of Crypto lending. This is when Crypto is used as collateral in order to obtain a loan from a reputable lender.
The loan is then paid back over time until the Crypto asset is returned to the borrower. Someone with a decent amount of Crypto as an asset might choose to use it to obtain a loan if they want access to cash quickly but do not want to sell the digital currency.
Remember that Crypto is volatile and you might need to pledge additional coins if the value of your original amount goes down. Finally, do not forget to be aware of the risks of Crypto lending and to do your research thoroughly before finalizing a loan agreement with a lender.