Getting a loan in the traditional financial system could take a while especially if it is for something huge. Today, crypto holders can also get a loan with their tokens-which is quicker to get.
Crypto exchanges as well as lending/borrowing platforms make this possible. Crypto loans like every other crypto-related activity are not without risk.
In this post, we’ll learn about crypto loans and how to get one.
What is a Crypto Loan?
A crypto loan is just like a traditional loan however your crypto assets are used as collateral to access the loan in this
case. The loan is taken in exchange for liquidity from a lender that will be paid back in installments.
The crypto asset that is being used as collateral is to be returned once the loan is fully paid. A crypto loan could be loan-to-value [LTV], which is the percentage of the crypto you are using in this regard. This, however, differs in lending platforms or exchanges.
The duration of the loan terms could be in days, months, or a year or more. The interest rate is very low compared to personal loans and other forms.
Types of Crypto Loans
Crypto loan is of two types, they are centralized finance [cefi], and decentralized finance [deFi]. They are discussed below-
1. Centralized Finance [CeFi]
In this type of crypto loan, crypto holdings are controlled by a central authority during the repayment term. It is referred to as a custodial loan as it is in the custody of someone other than the owner. Many of the crypto loans today fall under this type of crypto loan.
2. Decentralized Finance [DeFi]
Decentralized means that there is no central authority. So in this case, a smart contract is being used to ensure that loaners follow the requirement. It is non-custodial which means that the borrower is still in control of his/her crypto asset[s].
However, a lender can take automatic actions against a borrower’s account if he/she defaults or miss a payment. In this type of crypto loan, the interest rate is higher compared to that of cefi.
What Crypto Assets Can Be Loaned?
As stated earlier, you need to own/hold a crypto asset to be able to get a crypto loan. If you have an account with Binance or other lending platforms such as Aave, Abracadabra, and so on, your crypto holdings can be used to take a loan.
Top crypto assets such as Bitcoin[BTC] and Ethereum [ETH] are the most popular used for taking a crypto loan. Several other altcoins such as Cardano [ADA], Tezos [XTZ], Binance Coin [BNB], and so on are used as crypto-collateral loans.
What Can a Crypto Loan be Used to Get?
A borrower can make use of the crypto loan at his/her discretion. It can be used to pay fees, house rents, purchase properties, exchange for other crypto assets, and so on.
Lending platforms and exchanges can either pay you in cash directly or via stablecoin pegged to the US dollar e.g. USDT, which can be exchanged in cash into your account.
It’s not all crypto exchanges or lending platforms that allow users to exchange cryptocurrency for another in this regard. It is very important to make research these platforms before getting a crypto loan.
How to Get a Crypto Loan in 5 Minutes
Getting a crypto loan is very easy as long as a user meets all the requirements. It takes less than ten minutes to get a crypto loan. Using a centralized exchange like Binance, listed below is how to get a crypto loan today via its Crypto Loan page.
1. Once you have an account with Binance, you can go ahead to input the amount and the crypto asset you want to borrow.
2. The next step is to choose the crypto asset you want to use as collateral.
3. You can then select the duration of the crypto loan which could be in days, months, or a year.
4. Click ”Start Borrowing Now” once you are satisfied with the details you provide for the loan.
Is there any Risk with Crypto Loans?
Crypto and its endeavors are always without risk, especially for its high volatility. Crypto loans are not without a high risk of liquidation depending on your collateral. This is because the price of the crypto asset can drop at any time.
The smart contracts that are prominent in defi loans are also vulnerable to attack. This can lead to the loss of your loaned funds or collateral.
Diversifying your portfolio by choosing other crypto assets is good but not in the case of lending. This amount is an extra risk to your portfolio.
Getting a crypto loan is risky just as every other crypto endeavor because of its high volatility which also comes to play here. You must do your research on lending/borrowing platforms as well as exchanges before jumping to take a crypto-collateral loan.
Also Read- What is Crypto ICO?