So you’ve bitten the bullet and decided to acquire some cryptocurrency and perhaps even a range of other digital assets. The question is – what’s next? People often view cryptocurrencies as an alternative store of value and investments that they hold until their value appreciates. However, this can take several months and up to years to happen. In the meantime, a considerable amount of a person’s net worth remains locked up.
This is where crypto loans come into the picture. In this article, we’ll explain what it means to use crypto to get loans, and we’ll share some ideas about why you should consider using your crypto for loans. Then, with a clearer picture in mind, you’ll hopefully be better able to make full use of your assets.
What is a crypto-backed loan?
As its name suggests, a crypto loan is a form of loan that involves using cryptocurrencies as collateral. The borrower pledges, as security, a certain amount of cryptocurrency in proportion to the FIAT loan required. In return, they will obtain a certain amount of FIAT for a specific period. Then, all they have to do is repay their loan with monthly re-payments that consist of a small percentage of the loan principal plus interest. In the rare cases that a borrower defaults and does not pay back the loan, the lender liquidates and keeps part of the cryptocurrency deposited as collateral. The rest is given back to the borrower.
There are numerous benefits to obtaining a crypto-backed loan. For one, borrowers can secure their loans at a far quicker rate than with traditional banks. Instead of waiting for the lender to complete long and arduous background checks, credit score verifications, and document validations, borrowers can obtain their loans almost instantly. They will only need to verify their identity by providing a few standard documents, and the whole verification process can be very fast: as fast as 15 minutes!
Beyond this, anyone can obtain a loan from a crypto lending platform. Typically, only borrowers who have appropriate profiles can have their loan approved by a traditional bank for various reasons. But in the case of crypto-lending platforms, all of these issues are circumvented! All you need to do is deposit the required amount of cryptocurrencies as collateral, and that’s it.
What is a Crypto Lending Platform, and how does it work?
A crypto lending platform serves as a primary lender to borrowers. Think of it as the equivalent of a financial institution, allowing people to borrow FIAT directly from the platform itself. Beware that these platforms are different from peer-to-peer lending platforms because P2P platforms connect people who want to borrow with people who want to lend. How these platforms work is pretty straightforward, but before we jump into that, there are some issues to consider. These include the loan-to-value (LTV) ratio offered, the interest rate required, the loan terms, and the loan sizes available.
The LTV offered, in particular, is an important mechanism to take note of. This represents the ratio between the collateral you’ve put up on the crypto loan platform, and the loan amount that you’ll get in return for it. Generally speaking, the higher the LTV ratio, the more cash you will get in return for the cryptocurrency collateral that you put up. Because of this, you might want to seek out platforms that give higher LTV ratios. Nebeus, for example, allows users to borrow up to 80% of their crypto collateral’s value, depending on which loan option you choose. It is also essential to take note of the interest rate. This refers to the amount of money you are charged for getting a loan and is usually calculated as a yearly percentage. Ultimately, the interest rate is an amount that you will have to repay together with your loan principal.
Finally, it is also good to consider the loan term (length of your loan) and the size of the loan that you can secure. A loan term refers to the amount of time for which you take out your loan. These usually start from a month and can go up to over a year. A loan size, on the other hand, is simply how much cash you can borrow.
You should keep all these factors in mind as you decide which crypto-lending platform to use. Ideally, you want to choose a platform with a good LTV ratio and a low interest rate. If it suits your needs, you may also consider using a platform that offers flexible loan terms. Once you’ve had a good think about this and have chosen your platform, it’s time to jump in. While the specific process may vary from platform to platform, it generally involves the following steps. For the purposes of this explanation, we will use Nebeus as an example.
First, open an account with Nebeus and transfer the crypto assets you wish to use as collateral from any of your other wallets. Then, choose your loan after carefully considering the LTV ratio you desire. You should be mindful of interest rates as well, but in Nebeus’s case, there isn’t much to worry about as it provides one of the lowest market interest rates. Finally, you’ll instantly receive your loan in EUR, USD, or GBP directly from the platform’s treasury. You can then transfer your borrowed money to any bank account or bank card. But don’t just take our word for it – try it out for yourself 😉
Is Crypto Lending Safe?
As with just about anything, crypto lending and using cryptocurrency to get loans is an activity that has its risks. However, with knowledge of these risks and how to mitigate them, you’ll find that crypto lending is ultimately a safe process.
One area where potential risks might arise is if the value of the collateral drops significantly. In particular, if a cryptocurrency’s value falls to a level where the borrower’s collateral is less expensive than the loan that the platform gave out. If this happens, the platform will inform the borrower that they have to increase the value of their collateral or risk liquidation. To mitigate against this, some platforms, like Nebeus, have ensured to put in place alerts and monitors to help customers observe the status and performance of their loans.
However, beyond the above, you’ll find that there is not much else to worry about. Hacks have yet to occur to centralized crypto lending platforms. That said, the best platforms have already taken steps to integrate cold storage solutions to ensure that your collateral is kept safe offline and away from malicious actors. Furthermore, most of the top players in the US and Europe have ensured that they are compliant with the relevant laws of their jurisdiction, thus preventing the risk of being forced to shut down by governments.
Ultimately, these platforms that allow you to use crypto to get loans paint an exciting picture of the future. Centralized platforms, like Nebeus, help provide unprecedented access to financial services. Crypto-collateralized lending will only continue to grow in the future, hand in hand with the crypto revolution. Your best bet for starting to use your crypto investments is to do research, choose what platform suits you best, and finally get a loan!