Complete Guide to Crypto Loans
Posted by Frank Gogol in Loans | Updated on May 30, 2023
The crypto ecosystem has taken on many features of the traditional economy, such as lending and other financial services. Crypto financial services are split into centralized finance platforms, which resemble normal online lenders, and decentralized finance platforms, which are an innovation unique to crypto. Read on to learn what a crypto loan is and how it compares to traditional loans.
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What Are Crypto Loans?
A crypto loan is just like any other loan. However, all crypto loans are currently secured loans. That security (also called collateral) must also be in the form of a cryptocurrency that your lender accepts.
In other words, it is not currently possible to get a crypto loan by having a good credit score or using your house or car as collateral. You must already have cryptocurrency to get a cryptocurrency loan.
First, you deposit some amount of cryptocurrency with a lender, then you are allowed to withdraw a loan in whatever cryptocurrency you choose. Usually, the maximum size of your loan is limited to some fraction of the value of your deposited collateral. Some lenders limit this to 50%, others allow up to 90%.
Crypto loan repayment periods vary widely but are usually much shorter than traditional loans, from a few days to several months. Interest rates can go very low, even 0%, depending on the collateral and loan currency.
In simplest terms, a crypto loan is a way to keep your crypto while still having some spendable (liquid) funds. It is most useful for crypto traders.
Different Types of Crypto Loans
The two types of crypto loans differ primarily by the types of lenders who offer them. DeFi loans are offered by decentralized finance (DeFi) lenders and CeFi loans are offered by centralized finance (CeFi) lenders.
The difference between DeFi and CeFi generally comes down to how your crypto is handled and how decisions are made about the lender’s operations (approving loans, charging penalties, setting interest rates, etc.).
Here’s a summary:
- DeFi: Operations are handled by computer programs running on a blockchain. These programs are called smart contracts.
- CeFi: Operations are controlled by a normal company, much like an online lender. You deposit your collateral to the lender’s wallet, and they maintain control until you repay the loan.
Uses for Crypto Loans
A crypto loan is much like a personal loan. Once you receive the crypto from the lender, you can do whatever you want with it. All of the things you can directly use crypto for, you can use a crypto loan for.
Crypto loans are used primarily by traders because it allows them to maintain liquidity in different cryptocurrencies without having to sell their holdings.
Another option is to take a loan out as a stablecoin, then withdraw that through an exchange as fiat cash. However, this leaves your collateral quite vulnerable to fluctuations in the value of the crypto relative to the stablecoin.
Pros and Cons of Crypto Loans
The concept of crypto loans is relatively new and unfamiliar to a lot of people. Some benefits and disadvantages of crypto loans are outlined below.
Pros of Crypto Loans
- Your credit score doesn’t matter,
- Essentially instant approval,
- Flexible repayment terms, and
- Interest rates vary widely, usually very low.
Cons of Crypto Loans
- Can lead to the liquidation of your collateral unexpectedly (crypto volatility),
- Requires you to already have crypto,
- Unsecured loans are not possible,
- Crypto lenders are subject to less regulatory oversight than traditional lenders.
If you are interested in getting a crypto loan, a few lenders are discussed below.
Nexo is a CeFi lender that offers insurance for customers’ deposited collateral. If you use the platform to lend your crypto to other users, you could earn up to 17% annual percentage yield (APY). If you get a crypto loan from Nexo, the interest rate will be a maximum of 13.9% (potentially much lower).
Unchained Capital is a U.S.-based CeFi lender that offers bitcoin loans. If you want to get a crypto loan from unchained capital, you have to have a hardware crypto wallet.
is among the oldest of the DeFi lending platforms that still exist. This platform is only available on the Ethereum blockchain and uses a unique interest mechanism. If you deposit a stablecoin crypto loan in Compound you can expect an APY between 0.6% and 1.3%.
AAVE is a major DeFi lender that is available on several blockchains, including Ethereum. Alongside normal crypto loans, AAVE also offers a new type of loan, which is only possible with crypto, called a flash loan. Flash loans are a highly innovative financial product that was first introduced by AAVE.
Mango is a lending platform on the Solana blockchain. In addition to normal crypto loans, Mango also offers leveraged trading.
How to Apply for a Crypto Loan
Generally, applying for a crypto loan is as simple as clicking a few buttons, especially with a DeFi lender. Rather than your credit history, the amount and type of crypto loan you can get is determined by the amount and type of crypto you can provide as collateral.
Alternatives to Crypto Loans
Depending on your needs, there are some alternatives to a crypto loan that you can explore, for example:
- The collateral for a home equity loan is your home. If you choose this option, it should be for something extremely important, and you must be certain that you will be able to keep up the payments. otherwise, you lose your home.
- Many credit card lenders have cards with 0% interest, as long as you fully pay off the balance within a certain period (usually several months).
- Credit unions consider factors other than your credit score when making lending decisions. That means if you have a years-long history of being financially responsible with a credit union, that can count in your favor for a loan application.
- Many online and traditional lenders offer unsecured personal loans. You can get a small loan this way, but expect to pay high interest.
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A crypto loan is a secured loan that uses your deposited crypto as the basis for a loan in another cryptocurrency. You can use a crypto loan for anything you can use crypto for. Currently, crypto loans are mostly useful for crypto trading. It allows you to maintain your holdings in one cryptocurrency without selling, but still make trades in other currencies. If you fail to repay a crypto loan, your collateral will be liquidated to repay the debt. Crypto loans don’t have credit checks or other requirements. Whether you are approved depends almost entirely on the type and amount of cryptocurrency you deposit, especially with DeFi lenders.