What Is a Crypto Loan and How Does It Work?

What Is Crypto Lending?

With a crypto loan, you pledge a portion of your crypto holdings as collateral for the money you borrow.

As with a secured loan like a car loan or mortgage, you retain ownership of your cryptocurrencies while you pay down the loan. If you fail to repay the loan as agreed, however, you risk losing some or all of your collateral.

Learn more: What Is a Secured Loan?

How Does Crypto Lending Work?

The borrowing process with a crypto-backed loan may vary depending on which platform you choose. In general, though, here's how it works:

1. Check your balance. Depending on the platform, you may be able to borrow as much as 97% of your digital asset balance, though many platforms have lower loan-to-value (LTV) limits. Check your crypto balance to determine whether you can get enough to meet your borrowing needs.
2. Choose a lending platform. Next, you'll want to shop around and compare lending platforms. Factors to consider include the platform's reputation, supported cryptocurrencies, interest rates, LTV maximums, fees, repayment terms and security features. In some cases, you may need to exchange an ineligible currency for an eligible one before applying.
3. Deposit your collateral. You'll transfer some or all of your crypto to the platform as collateral.
4. Receive your loan. Once the collateral is confirmed, you'll receive your loan, usually in the form of fiat currency or stablecoins. No credit check is required, and funds are often disbursed quickly.
5. Make payments. You'll repay your loan in regular installments, including any interest charged. The platform holds your crypto until the loan is fully repaid.
6. Reclaim your collateral. After you've paid off the loan and interest, your crypto collateral is returned to your wallet. If your collateral's value drops too much during the loan period, however, you may need to add more or risk liquidation.

Pros and Cons of Crypto Lending

While there are some benefits to getting a crypto-backed loan, it's crucial that you carefully consider the potential risks involved with high-volatility securities. Here's what to keep in mind.

How to Choose a Crypto Lending Platform

As you shop around, it's important to pay attention to several different features, including the following:

• Interest rates: Platforms may offer varying interest rates based on your LTV and the type of cryptocurrency you use as collateral.
• Fees: Some platforms charge origination fees, liquidation fees, custody fees, withdrawal fees and early repayment penalties. Always read the fine print to understand the full cost of using the platform.
• Repayment term: Choose a lender that offers repayment terms that align with your budget and goals.
• LTV max: The LTV determines how much you can borrow relative to your crypto collateral. A lower LTV is safer but gives you access to less cash.
• Supported currencies: Not all platforms support every crypto asset. Make sure your preferred crypto is eligible for lending or borrowing before committing.
• Platform risks: Choose a platform with strong user reviews, transparent practices and robust security features. Look for things like cold storage and two-factor authentication. Finally, check whether the platform is registered or licensed in your jurisdiction. Platforms that follow regulatory standards may offer greater legal protections.
• Liquidation policies: Understand how each platform handles collateral if the market turns. Some platforms automatically liquidate assets once your LTV crosses a threshold, while others may give you a warning first.

Alternatives to Crypto Lending

As with any financial decision, it's a good idea to research and compare several options before you settle on one. That's especially the case with relatively risky decisions like using digital assets to secure a loan.

Here are some potential alternatives to consider:

• Sell your crypto. If you don't have enough crypto holdings to meet minimum loan requirements or you need more than you're allowed to borrow, it may make sense to simply sell the digital assets you have to get the funds you want. Just keep in mind that there can be tax implications when you sell crypto.
• Take out a personal loan. Personal loans can be more expensive than crypto loans, but the upside is that many are unsecured, and you'll typically get a longer repayment period.
• Apply for a credit card with a 0% intro annual percentage rate (APR). If you have good or excellent credit, you may be able to get approved for a credit card with an introductory 0% APR promotion. These deals allow you to make purchases and pay them off over 12 to 24 months without interest. Just keep in mind that the card's potentially high ongoing interest rate will apply to any balance left over after the introductory period ends.
• Ask family or friends for help. Depending on your situation, you may be able to ask a family member or friend to help you with your financial issues. Be clear about the repayment agreement, and make sure you stick to it to avoid damaging the relationship.

Here's an overview of alternative financing options and how they compare to a crypto loan.

Alternative Financing to a Crypto Loan

Whatever you do, take your time to shop around and carefully mull over your options. Consider using Experian's comparison tool to compare personalized credit card and personal loan offers.

Tip: Avoid high-cost forms of financing like payday loans and auto title loans. While these can provide you with fast cash, they have incredibly short repayment terms and exorbitant interest rates.

Frequently Asked Questions

Build Your Credit to Expand Your Options

One of the reasons crypto loans can be appealing is that there's generally no credit check involved, and the alternatives can be high-cost loans. Regardless of how you choose to handle your current financial situation, take time to improve your credit so you'll have more options in the future when you need financing.

Start by checking your credit to review areas that you can address. You can check your FICO^® Score^Θ and credit report for free with Experian. Once you've reviewed your credit, take action to make improvements. This process can take time and effort, but it can pay off big time in the long run.