If you believe that you shouldn’t be the only one working and your crypto assets should do their part, too, you might want to get into crypto lending to stuff your wallet.
Or you might be interested in borrowing cryptocurrency for your personal needs. Whatever your situation is, we’ll talk about it in this complete guide to crypto lending.
And if it feels too complicated, you can always get a regular cash loan through services like Get Cash. Platforms of this kind match you up with vetted lenders by having you fill in a secure online application. With its help, you’ll be able to ask for a loan of anywhere between $100 and $5,000.
Crypto Lending — What It Is And How It Works
Crypto lending means taking cryptocurrency from one person and giving it to another for a certain fee. As a borrower, you can get a fast and secure loan. As a lender, you can get a stable income by providing your crypto assets to other users.
As a rule, three parties are involved — a lender, a borrower, and a Decentralized Finance platform (DeFi). The whole process involves several steps:
- The borrower requests a loan on a DeFi platform.
- The borrower puts up collateral as soon as the request is accepted. Alternatively, you can opt for a flash crypto loan that doesn’t require collateral.
- The lender funds the loan, and the borrower gets the money.
- The collateral is returned when the borrower pays off the loan and the interests.
To lend your crypto assets, you need to sign up on a DeFi platform and think of the exchange you’d like to use and the cryptocurrency you’d like to lend.
Investors can also fund your loan. In this case, the investor gets the interest.
As crypto lending has been getting popular recently, the selection of DeFi platforms is quite broad. You can opt for the popular ones like Binance, Abracadabra, and Aave, or do your own research to pick the one that suits you best.
Types of Crypto Loans
There are two main types of crypto loans — flash loans and collateralized loans.
A flash loan is given and repaid in a single transaction and doesn’t require collateral. If you can’t repay the loan, the transaction is canceled before it’s validated as if it never happened.
No human interaction is needed in such loans as a smart contract controls the process.
As you could have guessed from the name, a collateralized loan requires backing it up with crypto collateral you will get back as soon as you pay off the loan.
Due to the high volatility of cryptocurrency, such loans rarely have an LTV (loan-to-value) ratio higher than 50%, which means you can only get a loan valued at half of your collateral.
Crypto Loans — Pros And Cons
Why would you borrow money through crypto lending platforms when you can get a loan in a bank? Crypto lending has its advantages, but it also has its cons.
Advantages of crypto lending:
- The loan is easy to get. It’s accessible to anyone who can put up some collateral or pay off the flash loan.
- The process is completely automated and controlled by smart contracts.
- It won’t make much of an impact on your credit score.
Disadvantages of crypto lending:
- A higher likelihood of default compared to traditional loans.
- Getting a crypto loan is more complicated than simply using a credit card.
- Smart contracts might be vulnerable to cyber-attacks.
Crypto Loans — Useful Tips
The first and the most important tip for getting a crypto loan is to choose a reliable platform with a good reputation. However, there are other things to consider if you want the process to be successful.
- Read the loan terms carefully. That applies to any loan, and the crypto one is not an exception. You’re not obliged to accept the first offer, so look for the best interest rates and conditions.
- Study the market before you borrow or lend crypto. Your money will be locked for some time, so you won’t be able to react to sudden ups and downs.
- Evaluate the risks. Even if you’re handing over your crypto assets to a reputable platform, they can still be vulnerable to scams and hacks.
To sum it up, crypto lending can be an excellent alternative to traditional loans as long as you understand the process and there is a platform you can trust. It can be beneficial both for a lender and a borrower, as long as it’s within reason.
John is a financial analyst but also a man of different interests. He enjoys writing about money and giving financial tips, but he can also dive into relationships, sports, gaming, and other topics. Lives in New York with his wife and a cat.