Use coins as collateral for your loan – Forbes Advisor

As cryptocurrency continues to become more accessible and widely understood, consumers are finding new ways to spend 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 period, which varies from seven days to more than a year. But if you default, the lender can repossess your inventory to recoup the 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 from lender to lender, but you can usually get between 50% to 90% of your crypto values. If the value of your inventory decreases while the loan is open, you may need to provide additional collateral.

Interest rates are usually lower compared to other financing methods such as 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 economy

Centralized financial loans (CeFi) 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 period.

Decentralized economy

If you choose a Decentralized Finance (DeFi) loan, you borrow money from a decentralized application on a blockchain. You still have control over your inventory, but your lender can repossess your inventory if you default. DeFi loans usually have higher interest rates than CeFi loans.

How to get a crypto loan

To take out a crypto loan, you must have a cryptocurrency that your preferred lender accepts. Be sure to confirm with the lender before applying. Each lender has its own application process, but you can follow these general steps:

1. Create an account with your preferred lender
2. Verify your crypto holdings and identity
3. Choose the desired loan amount based on security and repayment period
4. Submit your application

Crypto lenders usually have fast processing times; you can hear back immediately and receive your money within 24 hours.

What can you use crypto loans for?

You can use a crypto loan for almost any legal personal expense, such as paying off debt, covering emergency expenses, or making necessary repairs. Some lenders may have restrictions on using your funds for business purposes, a down payment or higher education.

Advantages and disadvantages of crypto loans

Alternatives to borrow against your crypto

If you’re not sure you want to get a crypto loan, here are some popular options:

Sell ​​your cryptocurrency

If you have earned your cryptocurrency, you can sell it and use the proceeds for whatever reason. This can trigger a capital gains tax, just as it would if you profited from selling shares.

The tax rate will depend on how long you owned the cryptocurrency. If you have held the cryptocurrency for more than a year, you only have to pay the long-term capital gains tax rate. If it was held for less than a year, your income will be taxed at your normal 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 will be charged interest on the remaining amount.