Read up on cryptocurrency lending and find out what to look for when selecting a crypto lending platform that suits your needs.
What to Look for in Cryptocurrency Lending Platforms
The growth of cryptocurrencies has been phenomenal with over one billion people worldwide estimated to own and use cryptocurrencies in 2022. One of the fastest growing areas of crypto -currency is crypto lending. There are now tons of websites where you can get crypto loans without even going through a credit check.
Crypto loans are not only beneficial for borrowers. Investors have found crypto loans to be profitable and a good way to profit from their digital assets. Rather than simply buying cryptocurrency and holding it until it increases in value, investors can earn passive income from their digital coins while maintaining ownership through crypto lending.
What is Crypto Lending?
Crypto lending is a process in which investors lend their digital assets to borrowers in exchange for interest payments. The borrower secures the loan by using their own digital assets as collateral to secure the loan. No credit check is required to obtain the loan as long as the borrower fulfills the KYC requirements and provides the required collateral.
There are two types of crypto loans; Centralized lending (CeFi) and decentralized lending (DeFi).
- CeFi Lending: CeFi lending platforms are also known as custodial platforms because crypto assets are deposited and held by the site. You have no control over your guarantees with the platform holding your private keys. All aspects of loan terms and interest rates are determined by the platform. Generally, CeFi platforms are easier to use. Loans can be made in fiat currency or cryptocurrency.
- DeFi lending: DeFi lending platforms are not custodians. You keep control of your guarantees and your private keys. Rather than being managed by the platform, loans are managed through smart contracts. Loans are not available in fiat currency and will be made in cryptocurrency or stablecoins.
Basic Crypto Lending Steps
The process of getting a crypto loan will vary slightly from platform to platform, but the basics are the same.
- The borrower applies for a loan. CeFi platforms will require the borrower to meet KYC requirements
- Upon acceptance of the loan application, the borrower will deposit the required guarantees
- The loan amount is returned to the borrower
- Once the loan has been repaid on the agreed terms, the collateral is returned to the borrower
Advantages and disadvantages of crypto loans
Advantages of crypto loan:
- Fast Loan Approvals: Loan approvals for crypto loans are fast and loans are often cleared within a day
- No credit check required: As long as the borrower provides the required collateral, no credit check is required
- Lower interest rates: Interest rates are generally lower than personal loans from traditional lenders or credit cards
Disadvantages of crypto lending:
- Little regulation: there is very little regulation of the crypto lending industry, which can lead to certain risks
- Volatility of cryptocurrencies: Cryptocurrencies are often volatile and subject to large fluctuations in value. Borrowers could be subject to margin calls if the cryptocurrency they are using as collateral falls below a certain value, and may need to increase the amount of collateral
- Certain cryptocurrencies are not eligible as collateral: not all cryptocurrencies will be accepted as collateral for a loan, which may require the borrower to exchange for another cryptocurrency
- Locked crypto assets: Borrowers will not have access to their digital assets until the loan is repaid
Selecting a Crypto Lending Platform
A quick search online will provide you with dozens of sites offering crypto loans. Here are some of the things to consider when choosing a crypto lending platform.
- Amount of collateral required: The amount of collateral is determined by the Loan to Value (LTV) ratio of the loan. LTV is the amount of the loan divided by the value of the collateral. For example, a loan of $1,000 with collateral worth $2,000 has an LTV of 50% [$1000 (loan amount) / $2000 (collateral value) = 50% (LTV)]
- Interest Rate: The interest rate charged for loans is one of the most important factors to consider. Generally, the lower the LTV, the better the interest rate the borrower will receive. A loan with an LTV of 20% will have a more favorable interest rate than a loan with an LTV of 90% in most cases.
- Loan term: This can vary greatly from a few days to several years. Also check if you are being charged for prepayment of a loan
- Fees: Some platforms charge a loan origination fee, usually 1% to 2% of the loan amount.
- Cryptocurrencies accepted as collateral: Some platforms limit accepted collateral to a few popular cryptocurrencies such as Bitcoin, Litecoin, and Ethereum. Others accept 50 or more different cryptocurrencies as collateral.
- Currency loans are unblocked: Find out in which fiat currencies and/or cryptocurrencies the loans are made
- Minimum and Maximum Loan Amounts: Some sites will allow you to borrow as little as $50 while others have a minimum loan amount of $1,000 or more.
- Platform Reputation: How has the lending platform performed in the past?
You should always do your research on the lending platforms you are considering before making a final selection.