Lending and borrowing money is considered one of the potential ways of accruing wealth. Loans have for a long time been a go-to for many investors who are in the trance of business for maximum long-term profits.
When a fiat currency is to be borrowed or lent, there is usually a need to walk to banks for its application. This is often like a definite layer of trust between two parties, which is characterized by signing a contract.
With the advent of cryptocurrency, there has been some sort of revolution in the financial world, including the banking industry. Although crypto loans have been around for some time, many crypto users are still oblivious of its offerings, especially benefits.
What Is Crypto Lending?
Cryptocurrency lending is in a way similar to how traditional lending is achieved. Here, you can lend your crypto and earn interest on them, thereby making a significant profit for the long term. However, some platforms offer this feature, whereby your digital asset is equivalent to a crypto savings account while yielding a higher return.
Often tha not, it is possible to make returns 10 times higher than the annual returns yielded by traditional saving accounts.
How Bitcoin Lending Platforms Work
Crypto loans make use of a crypto coin or token as an equivalent of collateral for the borrowed of USD or other cryptocurrencies. Similar to the treatment of collateral when the traditional loan is borrowed, your collateral will be withheld until the full payment of your loan.
You are presented with the choice of the preferred asset you want tok get a loan in, but most of these platforms support USD.
Benefits Of Cryptocurrency Loans
1. No Credit History Check
To access crypto loans, you don’t need to earn yourself some credit scores and you also don’t need to pay the debt on your credit card to qualify for the loan.
2. Fast Funding
Unlike traditional loans that can be approved after some days, crypto loans are usually approved and funded the same business day you make the request. So you get funded fast.
3. Low-Interest Rates
Crypto loan interest rates are considerably lower than traditional bank loans. Meanwhile, it is not advisable to use crypto loans for large purchases because of the rates it offers in that regard.
Using Decentralized finance (DeFi), an access gate has been opened for crypto users to leverage trustless loans without a third party. Crypto loans with Defi are transparent without any verification process like KYC.
Things To Consider Before Engaging In Crypto Lending
Volatility is not a new feature in the world of cryptocurrency. Cryptocurrency is bound to suffer a crash at any given time, hence putting your savings in ruins, or plunging you into debt. In the event of borrowing digital assets whose price falls with the collateral, you will be required to increase the value of your collateral. So this is risky for borrowers using a platform that demands the maintenance of the loan-to-value ratio.
2. Borrowing Limits
There is a designed borrowing for different crypto lending platforms. Most of the limit is set at a loan-to-value ratio of 50%, albeit some services enable you to borrow about 90% digital assets in the equivalent of your collateral’s value.
3. No Insurance
In converse to the traditional financial institutions, official insurance is not issued by crypto platforms for the depositor’s cryptocurrency on their platform. Therefore, crypto loans are less secure and must be wary of choosing anyhow leading platform.
Crypto lending is considered safe like every other crypto transaction. Nonetheless, there are some particular risks associated with crypto lending, and this must be put into consideration. It should be noted that your crypto platform could be hacked or even turn out to be a scam. Do well to confirm you are using the platform’s original website to minimize your vulnerability to being scammed.