The Art of Crypto Loans: How to Do it Right

Taking a loan used to involve a visit to the bank and endless form filling. It was an exercise in bureaucracy and frustration - sometimes taking weeks to process. And any rejection would impact your credit score, making it even harder to borrow money next time.

As you pursue your financial goals, you may decide you’ll need a bit of extra liquidity to grow your investments, pursue projects, or build your business. Crypto loans can help you achieve your goals and secure your financial freedom.

What is a Crypto Loan

Much like a mortgage or a bank loan - a crypto-backed loan is where you borrow money against your crypto assets. You use your crypto as collateral to take a loan in fiat or another cryptocurrency. The level of collateral varies from platform to platform, but typically it would be between 150% to 200% of the loan value.

Platforms like MyConstant have made crypto loans more accessible and flexible. (Source: MyConstant)

The idea is to leave enough room for the movements of the crypto markets. For example, if you have a loan backed by BTC, and the value drops by 20% over the course of your term, your loan will be unaffected due to the high collateral. This protects both the lender and the borrower.

Some platforms that allow you to top up your collateral during times of extreme volatility. We’ll cover this in more detail later.

You can also find a loan that suits your needs. For example, some platforms focus on offering long-term, ultra-low interest loans while others charge slightly higher interest rates but over shorter terms.

With the volatility of the crypto market, the latter option is the most popular. Crypto loans are seen as an affordable and flexible option to banks.

Why Crypto Loans?

The appeal of crypto loans lies in the flexibility and ease of use, which can be completed without going to a bank. There’s a host of reasons why crypto loans could be for you:

• No credit checks: There’s no need for credit checks, since your crypto collateral secures the loan. Whether you take a loan or enquire about one, your credit score will not be affected, nor will it affect your eligibility for the loan.

• Speed: Once you’re verified and pass your KYC on your chosen platform, you can get your funds within minutes of making the loan. So, if you ever need a loan quickly for a project, home improvements, or unexpected emergencies, you can. It’s also handy in the fast world of crypto trading if you need liquidity to make a quick transaction.

• Competitive rates: You can get loans for as low as 3.6% APR - which is more competitive than most banks.

• Accessibility: Beyond credit checks, there’s often other barriers to loans. In some parts of the developing world, there’s simply no bank to go to, you might not have the necessary proof-of-funds paperwork, or there could be high fees. Crypto loans can help resolve a lot of these issues - you just need to have enough crypto as collateral. That’s it.

  
  

Taken as a package, it’s not difficult to see the appeal of crypto loans. You can get your hands on the funds quicker, at cheaper rates, and with fewer hurdles to overcome. You unlock the value of your crypto assets without having to sell them.

However, there are some things you need to look out for.

What to Look Out for with Crypto Loans

As with anything in life, nothing is perfect. There are some things you should consider before looking at crypto loans:

• Crypto volatility: The first risk is to do with your collateral. At times of market volatility, there’s a chance your collateral could fall below the loan-to-value (LTV) ratio needed to keep your loan secure. In this event, the platform will liquidate your loan and you will lose your crypto assets.
• Protections: As crypto is still a largely unregulated industry, you will not enjoy the same protections you would get with a bank loan,
• Late payments: If you’re late with payments, you will risk losing your crypto assets. Most platforms allow you a few days to make your payments at higher interest before going that far. However, always check the policies before taking the loan.

These risks can be managed. For example, some platforms have an auto top-up feature, where you can automatically top up your collateral during market volatility. This does require you to have those funds in crypto on the platform, ready to use. It’s also prudent to keep an eye on your cryptocurrency price for the duration of your loan term.

How to Do It Right

If you decide to take a crypto loan, you’ll be joining millions of people worldwide who are doing the same. However, some loans and platforms might be more suitable for you than others.

You can use your crypto assets as collateral for loans. (Source: Unsplash - Pierre Bothiry)

And it’s no secret, particularly in the last few months that some crypto platforms are not as secure as we’ve been led to believe.

The first thing is to DYOR - do your own research. There’s no shortcut to this, and it’s essential that you do it. Take a look at things like customer reviews, authoritative reports, and their terms and conditions. You should take particular note of the following:

• Length of term: Most platforms allow you to select how long you want to keep the loan for. It can be as short as 30 days and as long as a few years. In general, the best advice is to keep it as short as reasonably possible, as it will cost you less.
• Interest rate: Again, you can choose your interest rate - which varies depending on the length of term. The longer the loan, the higher the interest.
• Margin calls: As we went over earlier, platforms can liquidate your loans if your collateral value falls below a set amount - usually around 110% of the loan value - but it can vary.
• Repayment terms: Different platforms have different repayment terms. Some have early repayment penalties, while others do not.
• Crypto eligibility: Not all cryptocurrencies can be used as collateral. Check whether your chosen platform accepts your digital assets.
  

These are the core factors you need to consider before taking a loan. By combining these factors, you’ll find the right platform and deal for you.

Should You Take a Crypto Loan

During these turbulent times, not just in crypto but in the wider economy, it can feel risky taking a loan. However, by following the steps outlined in this post, you can mitigate the risks. Unlocking the value of your crypto without having to sell them could set you on the path to financial freedom.

Just make sure that you only borrow what you can afford to pay back, have enough collateral to reduce the chances of your loan being liquidated, and have a clear set of financial goals.