A cryptocurrency loan may be a way for crypto owners to gain liquidity or cash without having to sell and pay taxes. Borrowers can use the loan amount for emergencies, a major purchase, invest in a business, or to buy more crypto coins to add to digital asset portfolios.
Types of crypto loans
A flash loan enables you to borrow funds without a collateral. The loan amount is given and needs to be repaid within a single block on the blockchain. A smart contract controls the entire process. As the name implies, the loan needs to be paid after a short time. Collateralized loans give more time for borrowers to pay them back by providing a crypto collateral to the lender.
Steps in the borrowing process
1. A borrower chooses a crypto lending platform and requests for a loan.
2. The platform calculates how much crypto collateral they will require depending on the loan amount.
3. Borrower pledges their crypto collateral, and the platform releases the loan.
4. Borrower pays the balance and interest over a set timeframe.
5. Borrower gets their crypto collateral back after they pay the entire loan.
Each crypto lending platform may have unique rules and process, but this is how the process generally works. Most platforms don’t have penalties if a borrower can pay off the loan early.
Things to consider in choosing a crypto lending platform
• Interest rates–choose a platform with a good interest rate for your crypto. Interest rates may be lower than 10%.
• Duration of loan–platforms differs in the boundaries they set for loan duration. Check if it is fixed or flexible.
• Minimum deposit–check if a platform requires a minimum deposit amount.
• Collateral–compare collateral requirements among different platforms for a specific loan amount. Borrowers need to pledge more crypto than the worth of the loan, called the loan-to-value (LTV) ratio.
• Platform safety–look at a platform’s track record on security. The rising adoption of crypto has made it a target for cyber attacks. It’s important to check on the safeguards a platform has to protect their customers.
• Restrictions on location–some platforms limit their investors to a particular country or location.
Advantages
1. Borrowers can receive funds within 24 to 48 hours.
2. Lenders don’t check your credit, which makes it accessible to anyone.
3. There is a wide range of crypto loans. You may borrow from $100 to more than $1 million, depending on your crypto collateral. Borrowers can repay loans monthly or lump sum with terms of 30 days to a year.
4. Interest rates are lower compared to bank loans.
Disadvantages
1. No FDIC insurance. Borrowers may not get their assets back if the platform is hacked or goes out of business.
2. If the price of crypto goes down, LTV may rise too high and borrowers need to add more crypto to the collateral account, which increases the risk of not getting their collateral back.
3. Borrowers can’t trade, cash out, or earn interest once they pledge their crypto as collateral.
4. Loans may not be in fiat or cash. Some platforms release loans in crypto coins. Borrowers will need to exchange the coins for cash. This will take time and they may incur fees related to exchanging crypto.
5. Crypto loans may not be available in all states or countries. Make sure the lender you choose is legal in your state or country.
As you research on the best crypto lending platform for you, make sure it offers:
1. Multi-signature (multisig) wallets-a multisig wallet lets you control one of your keys, so you have authority on your crypto during the loan term;
2. Proof of reserves-an indication that you may get your crypto back in cases of unpredictable events;
3. Information on how crypto is stored-find out if they store crypto offline. Lenders who loan out crypto collateral accounts are high risk. It’s best to avoid these types;
4. Track record-look for reviews and see if they have strong security protocols, employ best industry practices, and excellent customer experience;
5. Insurance coverage-if a lender promises insurance for digital assets, check how much coverage is available and for what type of events.
You can use your XMR as collateral to borrow from crypto lending platforms, such as YouHodler, CoinLoan, Nexo, or Binance Lending Program. Please note that these are not recommendations. Research on these and other platforms before putting in your XMR. Monero owners need to have secure crypto wallets to keep their XMR in, whether or not they intend to use them as collateral. There are a great deal of hot and cold wallets available for each type of crypto asset and it’s highly recommended that you have both kinds. If you’re looking for an open-source web-based Monero wallet, sign up for an XMRWallet. It enables you to have faster, easier, and uninterrupted Monero transactions.
