So-called crypto credit, in which users deposit cryptocurrency as collateral on an online lending portal, to get loans automatically credited to them on their bank accounts or digital wallets, is already a fast-emerging trend.
Borrowing against their crypto stacks via this form of financing allows investors to scale into deals without having to sell investments that trigger horrific tax events. But the selection of a good platform is key to success.
Choosing a Lender
These loans require no credit check or proof of income, and many allow borrowing at low interest with fast funding if your price does not drop too precipitously; but if it does, your collateral could become worth less than your loan amount and your platform could liquidate the collateral to pay off your loan.
To mitigate risk, it makes sense to put up for loans only liquid and safe assets such as recently arrived ‘Virtual Gold’ or ICOs (Initial Coin Offerings) – for many lenders, collateralisation involving new and/or high-volatility coins is a no-no anyway.
So, to get a crypto loan, you’ll have to connect your wallet to the lending/borrowing site. Some lenders permit you to choose which of your assets will be held as collateral. Some firms, however, pool several assets together in an rehypothecation pool, effectively adding a risk that, if a lender decides to rehypothecate, you’ll be unable to reclaim the funds committed to your collateral; or, another possibility, lenders could simply use your assets for other purposes, like trading on their markets, or providing rewards, if your contract with them stipulates that you can reclaim only a portion of your funds.
Collateral
A crypto loan essentially allows cryptocurrency owners to pledge their assets upfront and receive funds against that as a loan for a period, much like a secured loan for a car or a home, where your crypto currency is used as collateral against a loan. This allows immediate access to cash, the elimination of having to sell assets – and any gains that accrue if the market prices go up!
But that’s not to say that lenders do not have their collateral requirements and risk factors, and that all financial institutions will accept cryptocurrency as collateral. Not all lenders do.
If you are considering taking out a cryptocurrency loan, research which cryptocurrencies the platform supports, whether the platform provides customer support, and check the loans’ terms. Decentralised finance (DeFi) platforms like Aaveare industry leaders: they offer collateralised loans with high Loan-to-Value (LTV) rates in multiple cryptocurrencies and new kind of loans called flash loans with single-tx arbitrage opportunities.Security and liquidity risks in cryptocurrencies should be carefully considered too.
Interest Rates
Cryptocurrency loan providers usually charge a flat fee or a percentage of the amount you borrowed to cover costs, as well as transaction fees on the network to transfer to an address or sign a smart contract, these fees all amount to your final borrowing costs.
As with all loans, you’ll be asked to put up some of your liquid assets, in effect lending them to the lender, but this time the lender doesn’t sell them like a traditional lender, if you default, nor do they tarnish your credit report like a sale does.
Also, at this time, you will want to decide on an interest-only loan or a principal
and interest loan. The interest-only loan requires only the payment of the
interest for an agreed time period (often three to five years), while the principal
and interest loans require you to pay off both the interest and principal
(either a one lump sum or regular payments over time). Some loan providers
charge an origination fee, so do your homework in advance before signing any
notes or loan agreement.
Repayment Terms
You ‘put up’ your crypto as collateral to cover possible default. In the same way, if they are able to meet safe lending standards, accommodate regulatory compliance for anti-money laundering and safe custody, and offer excellent customer service, then in the worst case, they will be able to cash out the coins and at least recoup their losses from the original loan. Choosing your lender matters tremendously. Be sure that you are going with an organisation that meets the safe lending standards and has a history of transparency and excellent service.
On top of this, some lenders use a crafty method to add extra costs. For example, you might be charged an origination fee and a network fee. A further cost to consider is the staking charge. There might also be a minimum transaction limit.
Cryptoloans are quick to get funded, and will lend to you with no credit checks and flexible repayment schedules without ripping you off with high interest rates and crypto volatility: if you miss payments, your collateral requirements will be enforced against you – mind these risks when crafting your budget, and work them in; for the best safety, use stablecoins such as Tether or Circle – Ethereum (ETH) still ranks as the de facto ERC20 standard of most crypto-borrowing platforms so far.
