How Crypto Loans and Lending Work. Image credit: AdobeStock
An instant crypto loan may be necessary if you hold a significant amount of crypto and want to get hold of some cash without selling it and having to pay taxes. HODLers can invest their crypto funds in lending platforms and benefit from receiving interest payments.
But there is a catch: digital currencies like Bitcoin are volatile, which is why stablecoins have emerged as better alternatives for crypto loans.
Certified financial planner Travis Gatzemeier says that despite the risks associated with cryptocurrency investments, it can be profitable to participate in crypto loans schemes. He adds that cryptos are different from normal stable assets that people often use as collateral to borrow loans. In fact, crypto loans have gained momentum across social media domains such as Reddit and YouTube.
This is a form of decentralized finance (DeFi) scheme that allows people to lend out their digital currencies to borrowers. With crypto lending, lenders earn interest (or crypto dividends) and many online platforms provide a DeFi service, specializing in stablecoin loans among other cryptos.
In recent years, cryptocurrency has become a common means of payment as blockchain technology presents a huge investment opportunity. Your digital assets can grow in value as you HODL them. You can use a crypto loan calculator to determine your earnings based on the interest rate.
A crypto holder who owns bitcoins can earn a passive income by depositing their BTC into their account on a lending website. The platform can lend these funds out and you receive weekly or monthly interest payouts. Typical crypto lending rates can vary between 3% and 17% depending on the currency and market conditions.
For example, on YouHodler, you can earn up to 7% APR on BTC, ETH, XRP, XLM, LTC, and BCH. YouHodler is the lending company that has the highest loan to value ratio (90%) with minimum loan amounts. Users can repay their loans using credit cards and stablecoins such as USDT.
Crypto loan borrowers also have the opportunity to stake their crypto as security or guarantee of repayment. This means investors can sell the crypto holdings if the borrower doesn’t pay. It’s a win-win situation for the borrower and the lender.
In some cases, lending platforms can recover their losses by requiring borrowers to stake 25% to 50% of the loan in crypto. This caters for the event that the borrower is unable to pay off the debt.
With custodial centralized finance (CeFi) loans, central authorities manage the collateral, so traders cannot access their collateralized assets. It is the lenders who have control over the private keys of the assets involved. Overall, custodial cryptocurrency loans are more widely accessible than traditional loans. About 80% of crypto loans today are custodial, but the number keeps changing.