What Is Crypto Lending? A Beginner’s Guide To Digital Asset Loans
Victoria Araj4-minute read
February 11, 2022
In recent years, the use of cryptocurrency has grown exponentially across the globe. The current cryptocurrency market cap sits at $1.98 trillion, and 97% of its users consider cryptocurrency as a reliable source of income.1,2
Crypto lending is a newer component of the digital finance industry and has piqued the interest of crypto enthusiasts to use their investments for refinancing purposes. However, as a new concept, crypto lending comes with its advantages and disadvantages. Learn more about what crypto lending is and what to consider before investing.
Disclaimer: While we don’t offer crypto lending services, we’re happy to provide you with this information to keep you informed of your loan options.
Table Of Contents
What Is Cryptocurrency?
Cryptocurrency is a digital form of currency that uses electronic tokens rather than physical money. Most cryptocurrency networks use blockchain systems or digital ledgers to track digital transactions for services and goods.
To use cryptocurrency, the user has a digital wallet that stores electronic tokens. With a wallet, the user is able to trade and transfer the digital assets through the system using a provided key. The key allows the user to write their transaction in the public ledger.
How Does Crypto Lending Work?
A crypto-backed loan uses digital assets as collateral, comparable to using physical assets, like your house, for a mortgage loan. It works similarly to securities-based loans, as you use your electronic currency to receive a loan and pay it off over an indicated period of time. Currently, you can receive this type of loan through crypto lending networks and exchange platforms.
Paying your mortgage with cryptocurrency is a newer concept, and many mortgage lenders have yet to officially adopt it as an acceptable form of payment. However, some have begun to recognize cryptocurrency as a digital asset to determine how much you’re qualified to borrow when you apply for your mortgage.
This may change as mortgage lenders become more comfortable with digital currencies, but due to its extreme volatility, it will take time and a proven track record before it’s fully accepted in the housing market.
3 Benefits Of Crypto-Backed Loans
Crypto-backed loans have distinctive features that set them apart from other traditional secured loans. It’s important to be aware of the advantages of crypto lending before applying for a loan:
- Low interest rates: Crypto loans typically have a lower interest rate than alternative credit cards and personal loans. You may be able to receive a loan with an interest rate below 10%.
- No credit check: Most crypto lending networks and exchange systems don’t require a credit check when you apply. This can be appealing to those who don’t have a healthy credit score or lack a credit history.
- Fast funding: Once your loan is approved, you’re able to receive your loan funds in just a few hours.
In January 2022, bitcoin investors have actively sold more risk assets like technology stocks in response to tighter monetary policies from the Federal Reserve. Russia’s central bank recently proposed to ban the trading and mining of cryptocurrency. We recommend to cryptocurrency users to be cautious of changing policies and aware of the high-risk volatility of the currency when investing.
3 Drawbacks Of Crypto-Backed Loans
Although there are benefits to crypto lending, they come with serious risks. Here are several disadvantages to be aware of before choosing to apply for a crypto loan:
- No access to your assets: As long as you have a sitting balance in your loan, you’re unable to access your digital holding for any transactions or trading. This can be a problem if you need to pull out cash quickly or if the currency value drops significantly.
- Margin calls: A margin call happens when the value of your collateral falls below a specified threshold. Your lender will require you to increase your holdings to keep your loan and may need you to sell some of your digital assets. Cryptocurrencies are highly volatile, so there’s a high chance you may experience this with your loan.
- Repayment terms vary: Although these types of loans work similarly to installment loans, the repayment terms may vary. You may need to create your own repayment schedule to stay on top of making payments. It’s important to understand the terms beforehand to assess if you’ll be able to make these payments in the allotted time.
Low interest rates
No credit check needed
Receive your funds fast
Your preference of loan currency
No access to your assets used for collateral
Margin calls are common
Repayment terms vary
Not all electronic assets are eligible
Alternatives To Crypto Loans
As crypto loans are a new concept in the lending industry, there are alternatives to choose from if you need extra cash.
- A small loan: If you need a loan below $3,000, you can apply for a small personal loan. Lenders will likely require you to have a credit check, proof of income and your bank account information. It’s recommended to have a credit score of 620 or above.
- HELOC: With a home equity line of credit, you can borrow money against the equity your home has. You’re able to use this line of credit for a variety of purposes, including education and home improvement.
- Mortgage loans: If you’re looking to purchase a home and have a healthy credit score and clean credit history, applying for a mortgage loan can take some financial stress off your plate. Discuss your options and next steps with our Rocket MortgageⓇ
- Student loans: If you need help paying for higher education, applying for a student loan through a private lender or from the federal government is an option. There are different loan programs available — some don’t apply interest, while some start applying interest after you graduate. Do your research and discuss with your advisor to evaluate all your financial aid options.
- Loan from a friend or family member: If you’re having trouble being approved for a traditional loan, seeking financial help from a close friend or family member is another option. Be sure to detail how much money you need to borrow and a repayment plan so both parties are informed and understand the terms of the agreement.
It’s important to assess the risks involved in crypto lending, as it’s highly volatile in value and new to the home buying industry. If you’re considering crypto lending, be sure to compare the benefits and drawbacks, as well as potential alternatives, before using it to purchase a home.