Cryptocurrencies are dynamic and powerful cornerstones of decentralized finance (De-Fi). They can be used to make transactions, as investments, stores of value, and much more. Another unique element for cryptocurrency is your ability to take out loans and secure credit by using your crypto as collateral.
Most traditional loans are either secured or unsecured and require extensive credit checks and background information before a lender will extend any credit. However, crypto loans only require that you have a crypto balance and internet access.
This article will describe how crypto loans work and how they differ from traditional lending platforms.
Crypto Loans Use Your Portfolio As Collateral
Many investors and crypto enthusiasts are aware that crypto has the potential to appreciate, but they don’t know how to use it to its full potential. Since cryptocurrencies are dynamic and finite, many people want access to it. You use a portion of your existing wallet as collateral when you take out a crypto loan. There are two primary benefits to taking a loan against crypto: first, you keep your crypto once you pay off the loan, and second, you can increase your liquidity with a relatively low LTV.
Your LTV Is Important When Choosing A Loan Amount
Loan-to-value (LTV) is one of the most important metrics for crypto loans since it dictates the amount of crypto you are able to exchange for credit.
While other lenders may offer higher LTVs, crypto lenders keep theirs relatively low since cryptocurrency prices are more volatile. If your collateral dips in value, you may be required to put up more crypto until your balance meets its required value. For instance, if your initial $10,000 worth of collateral drops to $8,000, you will need to commit $2,00 more to meet your required collateral balance.
The Loan Funds Are Flexible
You receive a dual advantage from the lender when you take out a crypto loan. Many platforms offer cash equivalents or other cryptocurrencies like Ethereum (ETH) to fund your loan. So, if you have a highly appreciated crypto balance in one currency such as Uniswap (UNI), you can use your wallet to secure an Ethereum loan.
If you elect to take out a cash loan, you can use the proceeds to put a down payment on a large asset purchase, finance a new business venture, or use it for extra liquidity. Since the funds are so flexible and there is no credit check, crypto loans are a unique tool to secure financing.
Crypto loans can be an excellent way to optimize your crypto wallet while receiving access to affordable financing. While other lenders may offer variable interest rates that can quickly become burdensome, crypto loans are offered at fixed interest rates and terms. Crypto loans are a welcome addition to the De-Fi landscape because consumers can enjoy their crypto gains without sacrificing their ownership.