Latest news about Bitcoin and all cryptocurrencies. Your daily crypto news habit.
Cryptocurrency has gone mainstream. It has become a popular option among consumers and investors and is easy to buy, use, or invest in crypto. Cryptocurrency exchanges and other platforms let you take out a loan against your digital assets. There are several benefits of taking out a crypto loan, but you should know about the cons.
What is crypto credit, and how does it work?
You can use cryptocurrencies for many things, and taking out a loan is one. Youâll have to pledge a part of your crypto assets as collateral for the amount you will take out to get crypto credit. Like a secured loan, your cryptocurrencies will remain yours as long as youâre paying off the loan. However, if you default on your loan, youâll lose some of the collateral.
In many cases, the maximum amount you can borrow is 50% of your assetâs value, while some crypto lenders let you borrow up to 90% of your digital assetâs value. But there are restrictions regarding what can be done with the assets. You might lose your crypto assets if you default on your loan or if there is a significant drop in the value of your crypto assets.
Whether youâll get the loan amount in US dollars or any other cryptocurrency would depend on the platform youâre using. The type of cryptocurrency that can be used as collateral for a loan will vary from platform to platform. If you have a currency not supported by the platform youâre going with, youâll have to convert it to the right one.
Some lenders let non-custodial crypto be used as collateral. Non-custodial cryptos are held in your digital wallet, and theyâre not connected to any exchange. Some lenders make it mandatory to keep your digital assets in exchange for being eligible for a loan. You can rely on the security of crypto exchanges; however, you should not keep your digital assets on a platform youâre not confident about.
What are the benefits of crypto credit?
There are quite a few reasons why you should consider taking out a crypto loan. Some of the main reasons are as follows:
Lower interest rates - Crypto credits have lower interest rates than other loans like credit card loans or unsecured personal loans, and this is because they have assets as collateral. If you donât plan on using or trading your digital assets and only wish to save money, you should go for this option.
The ownership factor - With a crypto loan, youâll be able to get the cash you need without selling whatever crypto assets you have.
Speed - After you get the approval, the loan funds are given to you within a couple of hours at the very most.
No need for credit checks - While borrowing money from a crypto platform, the lender often wonât check your credit. If you donât have a good credit history and donât want to go for a bad credit loan, taking out a crypto loan is an excellent choice.
The cons of taking out a crypto loan
Although there are particular positives to taking out a crypto loan, there are specific cons that you should consider.
High minimum borrowing requirements - Although it differs from platform to platform, it may happen that you donât have enough assets to secure the lowest loan amount that your lender is offering you.
For example, the minimum loan amount offered by BlockFi is $10,000, and to be eligible for it, you need to have at least $20,000 worth of crypto assets since the loan amount has to be 50% of the value of your assets.
Short repayment terms - Generally, youâll need to pay off your crypto loan within a year. Crypto lenders don't give you much time to repay your debt, unlike other loans like personal loans, etc. If you fail to repay your crypto loan, it will result in the platform liquidating the assets you kept as collateral. In this case, youâll have to pay taxes if there has been an increase in the value of your assets after they were bought.
Margin calls - A margin call happens when the value of your collateral falls drastically below a certain limit set by your lender. If you donât deposit more assets, your collateral will be liquidated, which will have tax implications.
You canât access your crypto - While youâre repaying the loan, you wonât be able to spend or trade your crypto assets. It means that if the value of your assets drops, you wonât be able to do anything.
Conclusion:
If you have a significant amount of crypto assets and donât want to sell or trade them, you can consider crypto credit to get some quick cash. They donât cost much and are processed relatively quickly. Crypto loans do not require a credit check, which is a significant plus if you donât have a good credit score.
You can also consider lending out your crypto to increase their value. Before deciding what you're going to do, consider the opposing sides. You should think about what would happen if there is a sudden drop in the value of crypto. Consider increasing your credit score because that would give you more options.
Author Bio
Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific's McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a principal attorney.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.