It seems like everyone is talking about cryptocurrencies these days. Crypto is an increasingly mainstream way to make money and now it can also be the right choice for your lending needs. There are many things that cryptocurrencies can do that people are not aware of!
Crypto loans use digital currency as collateral to secure the loan. These are the same kinds of loans that you might take out when you do a cash-out refinance of your car or secure a personal loan with collateral of some kind. You will pledge your crypto as the promise to back your repayment of the loan.
If this possibility intrigues you, you should read on for more information!
What is Cryptocurrency?
Cryptocurrency is digital money and there are many kinds of this money available. You can pick from the original cryptocurrency, Bitcoin, or you could buy Ethereum, XRP, Cardano, or Stellar. These currencies are all based on blockchain technology and can increasingly be sold and purchased with ease.
Originally, you had to head to a specific cryptocurrency dealer website to get crypto and there were many ways to get scammed by people when you tried to buy your crypto. Now you can securely buy reliable crypto in many ways and through many sites. Businesses are increasingly recognizing this currency as a real currency that can be used for transactions and other financial needs.
How Crypto Loans Work
Most crypto loans are set up like auto loans. You pledge your cryptocurrency as the asset that secures you the funding. You will be offered the exchange for cash (USDC) from the lender and then you will pay back what you owe in monthly instalments that are impacted by an interest rate.
If you do not pay back the amount that you borrowed, the lender will liquidate your cryptocurrency to pay themselves back. There are specific lenders who will work with crypto in this way and they will offer variable loan terms and variable interest rates for the loans that you might be seeking to get. Most of these companies require a high minimum amount to make the risk of servicing the loan worth their time.
You can use your crypto loan to fund a new business partnership, to invest in other securities, or even to take care of an emergency need that has cropped up. There are not many differences between this lending process and a traditional bank loan, but the nature of the loan itself can be variable due to the variable nature of cryptocurrencies.
There are a number of companies that provide cryptocurrency loans, including LendingBlock, Crypto.com, Blockfi and a few smaller players.
Downsides of Crypto Loans
While this might all sound really great, you should be aware of the few downsides of crypto loans. These are considerations that you will want to keep in mind before you commit your crypto to become part of this kind of loan.
- Interest rates can be quite variable. This is due to the variable nature of the crypto market and how the value of these currencies can vary widely over the course of a given year.
- Asset values are not totally stable either, which means that you might get less cashback than you predicted based on the amount that you paid to get the cryptocurrency that you already own.
- Your assets will be locked, or effectively frozen if they are part of the loan. You will not be able to do anything with these assets until your loan is paid back.
- Not all digital assets are eligible for this kind of loan. There are many cryptocurrencies that are eligible for these lending programs, but you might need to shop around to find a lender that will work with some digital assets. There is no oversight that promises borrowers that they can use their crypto for these needs, so lenders can choose what they will and will not work with.
- Your interest account fund is not insured like it would be with a bank, so you will find that if the exchange fails, your loan will also be null and void.
Benefits of Cryptocurrency Loans
These loans also convey some big advantages. You will get your money right away and you will not have to submit to a credit check. You will also have the flexibility to choose who you work with as your lender and you will be able to determine what part of your cryptocurrency you want to stake. These lending guidelines are much more flexible than when you work with a bank with traditional assets.
Cryptocurrency is on its way to becoming a viable and sought-after commodity, and there are increasing opportunities for those who want to use it to invest, grow a business, or make more money!