Cryptocurrencies are gaining more and more territory in the financial sector, including cryptocurrency loans. Many people are aware that cryptocurrencies can be bought, sold, traded on the stock exchange and stored, but relatively little is said about loans in cryptocurrencies. In the following article, we will touch upon this topic.
Borrowing funds against cryptocurrencies is an interesting new topic in the cryptocurrency industry that is worth discussing in more detail.
Table of Contents
Short-Term crypto loans
Companies that offer crypto loans do it for a rather short term. As a rule, repayment takes place within a few days to a maximum of a year. Some companies offer repayment of the liability in such a way that interest is paid in the first months, and at the end of the term, a larger one-off payment is made on the principal amount.
At the moment, bank and non-bank loans have different APR rates, i.e. the annual percentage rate, which is the total cost of the loan borne by the consumer. The APR value is expressed as a percentage of the total loan amount per annum. This is an extremely important element of each loan, as it allows you to compare offers between banks, credit unions, and non-bank loan institutions.
The annual percentage rate includes in its calculations not only the percentage of the loan, but also all commissions, fees, as well as the costs of additional services necessary to obtain the loan. The amount of the annual percentage rate depends on the period for which the loan is granted, as well as the institution that grants it. Unfortunately, at the moment you can meet legal loan companies that offer APR from about 20% to even 2000%! For this reason, it is worth carefully examining the loan offer and the loan company.
A loan at a bank or in cryptocurrencies?
At the moment, whether it is more profitable to take a loan against cryptocurrencies or a bank loan, we will know after analyzing several factors:
- a) type of collateral (i.e. currency),
- b) the repayment period,
- c) the loan amount,
- d) borrowers – a natural person or a company.
At present, most cryptocurrency loan companies offer interest rates ranging from 10% to 20%. As you can see, this is an extremely cheap offer compared to almost all banking institutions. In addition, the very problem of debt enforcement in cryptocurrencies does not mean contact with the bailiff.
How do cryptocurrency loans work?
We take out loans in cryptocurrencies against other cryptocurrencies. If we make a commitment and pay it back regularly, our cryptocurrencies are waiting for us to be collected in a special and safe space. Many companies that grant loans against cryptocurrencies use numerous security measures for stored funds.
In the event that we are unable to repay the loan, our cryptocurrencies are transferred to the company that granted us the loan.
Cryptocurrency loans are also of interest for another reason. Crypto loan companies do not analyze our credit history. Taking a loan against cryptocurrencies means that it will not be recorded anywhere.
How does this translate into practice? Even if we take a large loan against cryptocurrencies, such action will not affect our creditworthiness. This is undoubtedly an advantage of crypto loans. For many entities, this type of loan is the only possible form of loan, as banks have long refused to help.
Crypto loans – how they work
The maturity options for crypto loans are as follows:
- 7 days,
- 14 days,
- 30 days
- 90 days.
Interestingly, it is possible to repay the loan in advance, and then you can only pay off the interest that is accrued daily in installments. The interest rate depends on the date the loan was granted. Under the standard formula, the principal amount of the loan can only be repaid after the interest is met.
The exception is when we pay the full amount to the principal amount before the payment date. At this point, interest will be charged in relation to the time for which we had the borrowed funds.
The borrowing of funds is based on capital security, which is called LTV. In short – this is the value of your collateral to the value of your loan. This price is the index price and different cryptocurrencies initially have a different collateral value. In practice, this means that two different cryptocurrencies with the same value may have different LTV, which will result in a different loan value.
Unfortunately, when you extend the repayment period, the daily interest rate also increases. In this case, the increase in the daily interest rate is as much as 300%. If we do not pay the liability within this time, our security will be liquidated to pay off the liability.
The funds we obtain from crypto loans can be used in any way. Crypto loan also allows you to trade your commitment on the exchange.
How to get a crypto loan?
In short, it can be indicated that the course of incurring a liability is as follows:
- The borrower creates a loan application.
- The borrower transfers the underlying assets to the loan
- The borrower receives a crypto
- After the loan and interest have been repaid, the cryptocurrency assets will be returned to the borrower.
The process of taking a loan against a cryptocurrency is not complicated. For people who value a low interest rate, do not want the lender check the credit history, and are also interested in modern technology, a loan in cryptocurrencies is an interesting solution.
