Learn about cryptocurrency lending and find out what to look for when selecting a crypto lending platform that fits your needs.
What To Look for in Cryptocurrency Lending Platforms
The growth of cryptocurrencies has been phenomenal with over 1 billion people worldwide estimated to own and use cryptocurrency in 2022. One of the fastest-growing areas in cryptocurrency is crypto lending. There is now a multitude of websites where you can get crypto backed loans without even being subjected to a credit check.
Crypto loans aren’t just beneficial to borrowers. Investors have found crypto lending to be profitable and a good way to earn from their digital assets. Rather than just buying cryptocurrency and holding it until it increases in value, investors can earn a passive income from their digital coins while still retaining ownership through crypto lending.
What is Crypto Lending?
Crypto lending is a process in which investors loan their digital assets to borrowers in return 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 completes KYC requirements and puts up the required collateral.
There are two types of crypto loans; Centralized (CeFi) lending and Decentralized (DeFi) lending.
- CeFi Lending: CeFi lending platforms are also known as custodial platforms because crypto assets are deposited to and held by the site. You have no control over your collateral with the platform holding your private keys. All aspects of the loan terms and interest rates are determined by the platform. Typically, CeFi platforms are easier to use. Loans can be made in fiat currency or cryptocurrency.
- DeFi Lending: DeFi lending platforms are non-custodial. You retain control of your collateral and private keys. Rather than being managed by the platform, loans are handled through smart contracts. Loans aren’t available in fiat currency and will be made in cryptocurrency or stablecoins.
Basic Steps in Crypto Lending
The process for obtaining a crypto-backed loan will vary slightly between platforms but the basics are the same.
- The borrower requests a loan. CeFi platforms will require the borrower to complete KYC requirements
- Upon acceptance of the loan request, the borrower will deposit the required collateral
- The loan amount is released to the borrower
- Once the loan has been paid at the agreed-upon terms the collateral is released back to the borrower
Pros and Cons of Crypto Loans
Crypto Loan Pros:
- Quick loan approval: Loan approval for crypto-backed loans is fast and loans are often released within a day
- No credit checks are required: As long as the borrower provides the required collateral no credit checks are required
- Lower Interest Rates: Interest rates are typically less than those for personal loans from traditional lenders or credit cards
Crypto Loan Cons:
- Little regulation: There is very little regulation of the crypto lending industry which can result in some risks
- Cryptocurrency volatility: Cryptocurrencies are often volatile and are subject to large swings in value. Borrowers could be subject to margin calls if the cryptocurrency they are using as collateral drops below a certain value, and may have to increase the collateral amount
- Some cryptocurrencies ineligible as collateral: Not every cryptocurrency will be accepted as collateral for a loan which can force the borrower to exchange for another cryptocurrency
- Crypto assets locked: Borrowers won’t have access to their digital assets until the loan is paid
Selecting a Crypto Lending Platform
A quick online search will provide you with dozens of sites offering crypto-backed loans. The following are some of the things you should look at when choosing a crypto lending platform.
- Amount of collateral required: The collateral amount is determined by the Loan 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 $1000 with the collateral having a value of $2000 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. Typically, the lower the LTV, the better the interest rate the borrower will receive. A loan with a 20% LTV will have a more favorable interest rate than a loan with a 90% LTV in most cases.
- Loan Duration: This can vary considerably from a few days to several years. Also, check if you are charged for paying off a loan early
- Fees: Some platforms charge a loan origination fee, usually from 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.
- Currencies loans are released in: Learn what fiat currencies and/or cryptocurrencies loans are made in
- Minimum and maximum loan amounts: Some sites will allow you to borrow as little as $50 while others have a $1000 or more minimum loan amount.
- Platform reputation: How has the lending platform performed in the pas
You should always do your research on the lending platforms you are considering before making a final selection.