A crypto loan is a type of secured loan in which your crypto holdings are used as collateral in exchange for
liquidity from a lender that you'll pay back in installments. As long as you make your payments and pay the
loan amount in full, you get your crypto back at the end of the loan term.
Typically, the crypto loan amount is a loan-to-value, or LTV, percentage of the cryptocurrency you are pledging as collateral. You can borrow up to 50% of your crypto's value with a lender like variable , or up to 90% with a lender like variable. Some lenders accept as many as 40 different cryptocurrencies as collateral, with Bitcoin and Ethereum being the most popular.
Loan terms can be anywhere from seven days to a year or more. Interest rates are low compared to personal loans and credit cards, with rates starting at a range of 0%-13.9% with a lender like Nexo. Crypto loans are attractive for holders who believe their crypto assets' long-term value will increase, but need cash for purchases in the present. But crypto loans come with inherent risks, like requiring additional collateral if the value of your crypto goes down and high penalties for missed payments.
There are 2 types of crypto loans: CeFi and DeFi. Centralized Finance, or CeFi, loans are custodial crypto loans where a lender has control over your crypto during the repayment term. Most crypto loans fall under the CeFi umbrella. Decentralized Finance, or DeFi, loans rely on smart contracts to ensure you adhere to the loan requirements. You retain control of your crypto assets, but a lender can take automatic actions against your account if you default or miss a payment. DeFi crypto loans can have higher interest rates than CeFi.
Whitelisted borrowers get access to a liquidity pool they can withdraw from that functions similar to a
revolving line of credit. Each liquidity pool may only be used by one borrower and it is not limited in
Borrowers can borrow up to a pre-agreed limit and repay from their liquidity pool as needed, only paying a
liquidity fee on unused capital and interest fees on used capital.
Borrowing Crypto For example, if a borrower only uses 20 ETH from their liquidity pool and has a borrowable capacity of 100 ETH, they pay a liquidity fee on the 80 unused ETH and a borrowing fee on the 20 borrowed ETH. At maturity of the loan, the borrower will repay their position with interest and can then withdraw from their liquidity pool without going through the whitelisting process again. This allows the borrower much more flexibility to access capital when and how it is needed.
Compared with traditional secured loans, crypto loans have unique features that can make them appealing for some crypto enthusiasts:
Low interest rates: While they're generally not as cheap as mortgage or car loans, crypto loans are an inexpensive alternative to personal loans and credit cards. You can often get a crypto loan with an interest rate below 10 percent.
Loan amount is based on asset value: In many cases, you can borrow up to 50 percent of your portfolio value, but some exchanges go as high as 90 percent.
Choice of loan currency: Depending on the platform and what you need, you can generally get the loan funds in the form of U.S. dollars or select cryptocurrencies.
No credit check: Crypto lending platforms and exchanges typically won't run a credit check when you apply, making it an incredibly attractive financing option for people with poor credit or no credit history.
If you need money and have sizable crypto holdings but don't want to sell them, crypto lending can be an alternative worth considering. Crypto loans can be inexpensive and fast, and they often don't require a credit check. Also, if you have digital assets that you plan to hold onto for a long time, lending them out via a crypto interest account could be an excellent way to maximize their value.