Cryptocurrency is making waves in the world of finance, and cryptocurrency lending is one aspect that is gaining popularity. Previously a niche product, mainstream companies are now offering crypto loans, and investors worldwide are adopting them.

A crypto loan is a protected personal loan that is backed by your crypto assets. You can use these assets as guarantees to secure the loan. If you pay back the loan on time, you will get your crypto assets back at the end of the loan term, which can be anywhere from 12 to 60 months.

If you fail to make payments and go into default, the lender can sell your assets to get the money they are owed. If you want to get a crypto-backed loan, you should read the deal carefully because each lender has their own rules, interest rates, and requirements.

The loan amount is calculated based on a portion of the cryptocurrency's value, typically between 20% and 70%. The interest rates on crypto loans are usually cheaper than those on personal loans and credit cards.

When you don't want to sell your crypto coins, you can borrow against them. This is similar to using your car, house, or stock as collateral for a loan. Let’s continue to explore crypto loans and learn more about the key benefits of them!

Can you get a crypto loan?

Whether you can get a crypto loan depends on the lending platform, but generally, yes, it's becoming quite easy to leverage your crypto for cash. Major crypto lending platforms and crypto exchanges offer crypto-backed loans that only require you to deposit your coins as collateral upfront.

Once approved, you will immediately receive the cash value of your crypto loan, minus any applicable fees. You keep the collateral cryptocurrency in your secure crypto wallet until you make the full repayment.

Some platforms even allow you to maintain ownership and trading abilities of your deposited crypto, which adds flexibility. However, this depends on the crypto lending platform you choose.

How do crypto loans work?

Let's use a hypothetical example. Say Sebastian has $10,000 worth of Ethereum he doesn't want to sell. On a crypto lending platform, Sebastian can use this Ethereum as collateral and borrow up to 50% of its value, or $5,000. The platform holds Sebastian's ETH and monitors its price.

If ETH drops below the loan-to-value ratio, his position faces liquidation—selling ETH to repay the loan. Otherwise, Sebastian can repay the $5,000 cash loan with interest over time. His ETH remains his property throughout. This is how crypto loans work, in the simplest terms.

Types of crypto loans

Crypto loans differ in terms of collateral requirements, interest models, and loan terms.

• Secured loans require over-collateralization, often 150–200%, to account for crypto volatility. Interest accrues daily.
• Unsecured loans have no collateral attached but come with a higher annual interest rate of 20% or more. Credit checks determine eligibility.
• Interest-only loans allow you to repay only the accruing interest, with the option to seize collateral if payments fail.
• Margin loans retain collateral value over the loan amount for continued leveraged trading. Exchanges offer these.
• Understanding types of crypto loans aids in choosing options that are aligned with risk tolerance, holding periods, and liquidity requirements. Failing markets force liquidations, so borrowing responsibly remains crucial.

Why take a crypto loan?

There are several reasons why clever crypto investors utilize loans. The following are some potential benefits of crypto loans:

• Liquidity can be obtained without the need to sell assets or face tax liabilities. Loans maintain crypto positions.
• Leverage your holdings to pursue additional investments. With collateral, one can take out loans much larger than personal capital outlays.
• Earn interest rates that are often lower than those offered by credit cards, while maintaining cryptocurrency upside potential. Rates range between 5 and 15% APR.
• By providing collateral, participate in DeFi yield farming. Earn higher returns while paying off loans.

Of course, if markets turn, there will be risks. Loans, however, extend cryptocurrency's financial utility far beyond simple buy-and-hold crypto trading strategies for the well-informed. Leveraging appropriately allows for multiplying returns over time.

What can a crypto loan be used for?

With cash in hand from crypto collateral, the world opens up for opportunities. Common uses of loan funds include:

• Paying off high-interest debt to become debt-free.
• Meeting emergency expenses or covering daily costs without selling long-term holdings prematurely.
• Investing in education, real estate, startup ventures, or other high-growth asset classes.
• Speculating through margin trading on exchanges to profit from short-term market movements.
• Donating to causes or supporting loved ones in need, all while keeping crypto.
• Generating stablecoin income through lending protocols to earn interest on idle cash.

Whatever one's financial goals, a crypto loan adds flexibility compared to outright asset liquidation. Handle responsibly to ensure positive long-term outcomes.

Pros and cons of crypto loans

As with any financial tool, crypto loans have advantages and disadvantages to weigh, such as:

Pros

• Retain crypto ownership and avoid taxable sale events.
• Cash liquidity can be obtained from otherwise illiquid digital assets.
• Leverage assets to gain more opportunity at lower rates than credit.
• You can pay interest in kind without using cash.

Cons

• Prone to crypto liquidation if collateral value declines sharply.
• Repayment still necessitates cash or a crypto sale at some point.
• Interest costs accumulate over time.
• Unregulated crypto lending platforms carry the risk of default.

Pros generally outweigh cons when used judiciously. Crypto-friendly companies, such as Cryptobunq, address cons by providing regulated services and secure DeFi experiences for all. Cryptobunq is a one-stop-shop crypto service provider that you can rely on for your crypto projects.

You can benefit from expert solutions such as the crypto exchange API, crypto checkout and invoicing, custody and wallet, batch crypto payments, tokenization, and more with CBQ. Secure crypto services all in one place!

Are crypto loans safe?

The safety of crypto loans depends heavily on the platform. Reputable lenders like Cryptobunq, with their robust security practices, instill more confidence than fly-by-night operators.

Some key security considerations include:

Proprietary wallet storage

Leading exchanges store collateral in secured multisig wallets.

Insurance

Coverage safeguards users in the event of an exchange compromise.

Audits and reserves

Regular audits ensure collateral reserves match outstanding crypto loans.

Repayment options

Flexibility to repay and sell collateral mitigates liquidation risks.

User verification

Know Your Customer checks reduce the chance of fraudulent activity.

Crypto loans, when used responsibly on trusted, proven platforms, can be reasonably safe. Just be sure to understand risks like market volatility or exchange hacks and only borrow what you can realistically repay.

What are the risks of crypto loans?

As with any borrowing situation, crypto loans do carry notable risks to prepare for:

Volatility

If the collateral value falls below crypto liquidation levels, crypto is auto-sold to repay the loan. You could realize losses. Tracking prices is key.

Platform failure

If an exchange fails, collateral and loans may be inaccessible until or unless they are resolved in bankruptcy. Therefore, it is better to diversify exchanges.

Regulations

Some nations are still figuring out how to regulate crypto space. Rules could change and affect loan structures over time. Stay informed.

Interest rates

Variable rates or macro shifts could make monthly payments unsustainable over the long haul. Do the math thoroughly.

Smart contracts

Some DeFi loan platforms rely solely on code for loan terms. If not built and tested properly, bugs could expose funds.

Before tapping crypto collateral, it is important to be aware of the inherent crypto and lending industry risks. Careful collateral management is paramount to staying solvent.

How do you get a crypto loan?

The process of obtaining a loan using your crypto assets as collateral typically consists of:

• Sign up for a crypto lending platform that supports your desired collateral.
• Complete KYC/AML verification procedures.
• Transfer your crypto collateral from your personal wallet to the lender's secure wallet.
• Specify the loan amount, borrowing term length, and interest repayment schedule.
• The lender reviews your application and collateral value ratios.
• Funds are deposited directly into your bank account once approved.
• Make timely crypto loan repayments over the agreed-upon term.

The bottom line

Crypto loans present a compelling opportunity for borrowers to access cash liquidity without selling crypto assets due to taxes.

With growing institutional interest and a diversifying array of products, they represent a viable bridge between decentralized finance and real-world spending needs. Just be sure to carefully weigh the inherent risks that cryptocurrencies and innovative lending platforms carry.

In this regard, Cryptobunq's blockchain and crypto services can be trusted. Cryptobunq is an expert crypto service provider that offers secure solutions for your projects. Check out our case studies to learn more about our services, and contact us to start benefiting from them!