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As cryptocurrency continues to become more accessible and widely understood, consumers are finding new ways to use their cryptoassets. One such strategy is a crypto loan, where borrowers use their crypto assets as collateral for a secured loan.
How do crypto loans work?
A crypto loan is a secured loan where your crypto assets are held as collateral by the lender in exchange for cash. As long as you meet your repayment obligations, you will get your crypto back at the end of the loan term, which ranges from seven days to over a year. However, if you default, the lender can repossess your assets to recover their losses.
The loan amount you are approved for is usually a percentage of the crypto you put up as collateral. The amount you can borrow varies by lender, but you can usually get between 50% and 90% of your crypto values. If the value of your assets drops while your loan is open, you may need to provide additional collateral.
Interest rates are generally lower than other financing methods such as personal loans and credit cards. For example, through a crypto lender like Nexo, rates range from 0% to 13.9%.
Types of crypto loans
There are two main types of crypto loans, each with significant differences.
Centralized finance (CeFi) loans are the most common option. BlockFi, Celsius, and Nexo are examples of CeFi companies. These companies hold crypto assets such as Bitcoin (BTC) and Ethereum (ETH) on behalf of their depositors.
CeFi companies control your assets during the term of the loan.
If you choose a Decentralized Finance (DeFi) loan, you borrow money from a decentralized application on a blockchain. You retain control of your assets, but your lender can repossess your assets in the event of default. DeFi loans generally have higher interest rates than CeFi loans.
How to get a crypto loan
To take out a crypto loan, you must hold a cryptocurrency accepted by your preferred lender. Be sure to confirm with your lender before applying. Each lender has their own application process, but you can follow these general steps:
- Create an account with your preferred lender
- Verify your crypto assets and identity
- Choose the desired loan amount based on your collateral and repayment term
- Submit your application
Crypto lenders typically have fast turnaround times; you can receive a response immediately and receive your funds within 24 hours.
What Can You Use Crypto Loans For?
You can use a crypto loan for almost any legal personal expense, like paying off debt, covering emergency expenses, or needed repairs. Some lenders may have restrictions when it comes to using your funds for business, down payment, or higher education.
Advantages and disadvantages of crypto loans
Alternatives to borrowing against your crypto
If you’re not sure if you want to get a crypto loan, here are some popular alternatives:
Sell your cryptocurrency
If you have made a profit on your cryptocurrency, you can sell it and use the proceeds for any purpose. This can trigger a capital gains tax, just like making a profit selling stocks.
The tax rate will depend on how long you have owned the cryptocurrency. If you have held the cryptocurrency for more than a year, then you will only have to pay the long-term capital gains tax rate. If held for less than a year, your earnings will be taxed at your normal income tax rate.
Take out a personal loan
Unsecured personal loans do not require any collateral. Interest rates vary depending on your credit score. If you have excellent credit, you may qualify for interest rates as low as 4% APR. Loan amounts range from $1,000 to $100,000 and repayment terms typically last between one and seven years.
Use a credit card
If you can qualify for a credit card with a 0% APR offer, you may be able to avoid interest. These offers usually last between six and 21 months. If you can pay off the balance before the offer expires, you will not owe any interest. If you still have a balance when the offer expires, you will be charged interest on the remaining amount.
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