Use Coins As Collateral For Your Loan – Forbes Advisorbit2main
Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors’ opinions or evaluations.
As cryptocurrency continues to become more accessible and widely understood, consumers are finding new ways to use their crypto assets. One of these strategies 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 holdings are held as collateral by the lender in exchange for liquidity. 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 more than one year. However, if you default, the lender can repossess your holdings to recoup its losses.
The loan amount you’re approved for is typically a percentage of the crypto you are pledging as collateral. The amount you can borrow varies by lender, but you can typically get between 50% to 90% of your crypto’s values. If the value of your holdings drops while your loan is open, you may have to provide additional collateral.
Interest rates are typically lower compared to other financing methods like personal loans and credit cards. For example, through a crypto loan 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. Examples of CeFi companies include BlockFi, Celsius and Nexo. These companies hold crypto assets such as Bitcoin (BTC) and Ethereum (ETH) on behalf of their depositors.
CeFi companies have control over your holdings during the loan term.
If you choose a Decentralized Finance (DeFi) loan, you are borrowing money from a decentralized application on a blockchain. You remain in control of your holdings, but your lender can repossess your holdings if you default. DeFi loans typically have higher interest rates than CeFi loans.
How to Get a Crypto Loan
To take out a crypto loan, you must hold a cryptocurrency that your preferred lender accepts. Be sure to confirm with your lender before applying. Every lender has its own application process, but you can follow these general steps:
- Create an account with your preferred lender
- Verify your crypto holdings and identity
- Choose your desired loan amount based on your collateral and repayment term
- Submit your application
Crypto lenders typically have quick turnaround times; you may hear back 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 making needed repairs. Some lenders may have restrictions when it comes to using your funds for business purposes, a down payment or higher education.
Pros and Cons of Crypto Loans
Alternatives to Borrowing Against Your Crypto
If you’re not sure you want to get a crypto loan, here are some popular alternatives:
Sell Your Cryptocurrency
If you’ve made a profit on your cryptocurrency, you can sell it and use the proceeds for whatever reason. This may trigger a capital gains tax, just like it would if you made a profit from selling stocks.
The tax rate will depend on how long you owned the cryptocurrency. If you’ve held the cryptocurrency for more than a year, then you will only have to pay the long-term capital gains tax rate. If it was 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 require no collateral. Interest rates will 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 repay the balance before the offer expires, you won’t owe any interest. If you still have a balance when the offer expires, you’ll be charged interest on the remaining amount.
Compare Personal Loan Rates From Top Lenders
Compare personal loan rates in 2 minutes with Credible.com