When Shall I Take Crypto Loans?
Firstly, what is a crypto loan? 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 or full.
In other words, a crypto loan is a security-based loan, such as an auto-loan or mortgage which uses your personal digital currency as collateral when borrowing money. Your digital assets are then restricted from being traded or being used for transactions before you have repaid the borrowed money.
Crypto lending is an easily-accessible service where you can lend out your funds with relatively low risk. On the other hand, you can also quickly gain access to borrowed digital assets at low-interest rates. Taking out and giving loans is often more straightforward, efficient, and cheap with crypto, making it an option worth exploring for both parties (lender and borrower).
Typically, the crypto loan amount is a loan-to-value, or LTV, percentage of the cryptocurrency you are pledging as collateral. For example, you can borrow up to 50% of your crypto’s value with a lender like Binance.
There are different types of crypto loans, a few are:
1. Collateralized loans
Collateralized loans are the most popular and require deposited cryptocurrency that is used as collateral for the loan. Most platforms require overcollateralization, which means that borrowers can access only up to a certain percentage of the deposited collateral (typically below a 90% loan-to-value). The lower the loan-to-value (LTV), the lower the interest rate, as well as a lower risk of being margin called.
2. Uncollateralized loans
Uncollateralized loans are not as popular, but they function similarly to personal loans. Borrowers must fill out a loan application, pass identity verification, and complete a creditworthiness review to be approved. These loans have a higher risk of loss for lenders because there is no collateral to liquidate in the event of a loan default.
3. Crypto line of credit
Instead of offering a traditional loan with a predetermined term length, some platforms offer a cryptocurrency line of credit. This is a type of collateralized loan that allows users to borrow up to a certain percentage of deposited collateral, but there are no set repayment terms, and users are only charged interest on funds withdrawn.
4. Flash loans
Flash loans are typically available on crypto exchanges and are instant loans that are borrowed and repaid in the same transaction. These are very high-risk loans that are typically used to take advantage of market arbitrage opportunities, such as buying cryptocurrency for a lower price in one market and instantly selling for a higher price in another, all within the same transaction.
When should I consider using crypto loans?
There are many benefits to using crypto lending as opposed to traditional, centralized financial lending. You may want to use crypto loans to be able to enjoy the following advantages:
· Low Interest Rates: Crypto loans are much cheaper as compared to traditional loans and credit cards. Some crypto lending platforms may offer as low as a rate below 10%. the interest rates vary by platform and require monthly payments. Also, the loan terms for crypto loans can be as short as seven days and may go up to 180 days and charge an hourly interest rate, like Binance platform.
· No Credit Check: Normally, taking a loan from a bank is a whole lengthy process. You will need to go through multiple credit checks, verifications and whatnot. But this doesn’t happen with crypto loans. In crypto lending, there is no credit checks or document verification, only your crypto portfolio value is needed.
· Fast Borrowing Rate: Crypto loans are given to anyone who can provide collateral or return the funds in a flash loan. This quality makes them easier to acquire than a loan from a traditional financial institution. Crypto lending platforms typically process your loan request within the same business day, rather than the lengthy step-by-step process at a bank to secure a traditional loan.
· Choice of Loan Asset: Crypto loans provides the flexibility of allowing borrowers to get their preferred assets. For example, if you are from the USA, then you can get a loan in US dollars or any asset that will be easy for you to cash out to your local currency.
· Smart contracts manage loans. A smart contract automates the whole process, making lending and borrowing more efficient and scalable.
· Simple to earn passive income with little work. HODLers can drop their crypto in a vault and begin earning APY without having to manage the loan themselves.
Nevertheless, before going into crypto lending, here are a few of the risks you have to know:
1. Margin calls
When users pledge collateral and borrow against it, a drop in the deposited collateral’s value can trigger a margin call. This happens when the LTV of a crypto loan drops below the agreed-upon rate. When this happens, borrowers either need to deposit more collateral to get the LTV back down or risk liquidation.
When crypto assets are deposited onto crypto lending platforms, they typically become illiquid and cannot be accessed quickly. Though some crypto lending platforms allow lenders to withdraw deposited funds fairly quickly, others may require a long waiting period to access funds.
Where Can I access crypto loans?
Binance, the world’s largest crypto exchange, not only allows you to buy & sell virtual assets in seconds, but also to both finance and stake your cryptocurrency. Binance prides itself on being a secure, fast, and elegant solution, attempting to provide monetary freedom across the globe. It is one of the best Crypto lending platforms out there. If you are new to Binance, you can click here to get an account and a new user bonus.
How Can I Receive and Repay Crypto Loans on Binance?
Receiving a crypto loan through Binance is very easy and fast. While logged in on the official Binance webpage, click on “Finance” .
Then select “Crypto Loans’’ from the pop up that appears. On the crypto loans page, select the asset you wish to borrow, the collateral asset, and loan term. Once all of your information has been confirmed, select “Start Borrowing Now”.
Once you have completed the steps above, you will be asked to confirm your information. It is recommended to read the Binance’s Loans Service Agreement to ensure you understand the agreement and your responsibility to repay the loan.
The collateral asset will then be removed from your spot account, and the received loan will be replaced with your loan amount. You are now free to withdraw your stable coin to your bank account or financial institution of choice.
NB:The interest rate is charged on an hourly basis, and the loan can be repaid at any time.
How To Repay Binance Crypto Loans?
Repaying your collected loan on Binance is very simple.Simply go to “ongoing orders” at your loan page and select “Repay” .
You can either enter the repayment amount manually, or select a repayment ratio. After reviewing and double checking the details, click “Confirm Repayment” to settle the loan.After your payment has been successfully processed,you will receive a confirmation message.Note that your repayment will include the loan interest and the original loan amount.
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