What are crypto loans?

Cryptocurrency has become a popular investment option over the past decade. But you couldn’t cash out of your crypto until you sold it. Then crypto loans arrived on the scene.

Crypto loans allow you to use your cryptocurrency as collateral to borrow cash. These secured loans typically have low interest rates and no credit check requirement. While they sound amazing in theory, there’s considerable risk involved if your crypto drops in value.

• What is a crypto loan?
• How do crypto loans work?
• Risks of crypto loans
• Why get a crypto loan?
• Pros and cons of crypto loans
• Crypto loan alternatives

What is a crypto loan?

Crypto loans are secured loans that use cryptocurrency as collateral. These loans work similarly to a mortgage or auto loan, except your cryptocurrency secures the loan instead of your house or car.

You can get a crypto loan for cash or a stablecoin cryptocurrency, depending on the lender. Stablecoin is a type of cryptocurrency whose value is tied to a real-world asset, like gold or the U.S. dollar.

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How do crypto loans work?

You can apply for a crypto loan at BlockFi, Celsius, Coinbase, and other cryptocurrency exchanges. When applying for a crypto loan, you choose your payout option (USD or a stablecoin if available) and put up your cryptocurrency as collateral.

You don’t have to worry about credit checks to qualify for a loan since you’ve provided collateral to secure it. Crypto loans generally have low interest rates. They also come with shorter repayment terms than other loan types, often 12 months or less.

If you’re approved for a crypto loan, funding can occur quickly, sometimes as soon as the same day, with funds deposited into a digital wallet of your choice or your bank account. Stablecoin loan transactions can happen even quicker, sometimes within minutes.

Lenders may charge an origination fee to cover processing your loan application. In many cases, the amount you can borrow depends on the total amount of cryptocurrency you have available.

You’ll make monthly interest and principal payments, either with cash or cryptocurrency, depending on the lender. Once you pay off the loan, your cryptocurrency is returned to you.

Risks of crypto loans

Crypto loans carry some risk for borrowers. The price of cryptocurrency changes regularly, sometimes with wild fluctuations. If the value of your cryptocurrency drops significantly, it could lead to what’s known as a margin call.

In this instance, you’d have to provide more crypto as collateral to keep a healthy loan-to-value ratio. Your LTV is the ratio of the loan amount to the value of your cryptocurrency collateral.

When you take out a crypto loan, you agree to a maximum LTV ratio with the lender. When your crypto value drops, it increases your LTV ratio. The only way to lower the ratio is to add more crypto funds to your collateral.

Another issue with tying your cryptocurrency up in a loan is that it becomes unavailable if you want to sell or trade. You won’t have access to those funds again until the loan is paid off.

Why get a crypto loan?

While taking out a crypto loan has risks, it could be advantageous in some situations. When you sell cryptocurrency, you could owe taxes on any gains earned. Taking out a crypto loan for cash allows you to move money out of your crypto account without any tax consequences.

A crypto loan is also an option if you want to make a larger purchase somewhere that doesn’t accept cryptocurrency as payment. It’s also a way to access funds quickly without a credit check and at a lower interest rate than many other financing options.

Crypto loans may also be an easier alternative to traditional borrowing if you need a large amount of cash quickly. You may have difficulty qualifying for a $50,000 personal loan, for example, but if you have at least $100,000 in cryptocurrency, you can likely get a crypto loan.

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Pros and cons of crypto loans

Cryptocurrency is a hot investment right now, and as with any investment it can be volatile. Because of that volatility, crypto loans have important benefits and drawbacks to consider:

Pros

• Quick funding
• No credit check
• Low interest rates
• No tax consequences

Cons

• High-risk borrowing
• Some lenders charge origination fees
• You can’t sell or trade your collateral cryptocurrency until the loan is paid off
• Cryptocurrency isn’t federally insured

Cryptocurrency can be a high-risk investment, so it’s important to weigh all the potential advantages and disadvantages of a crypto loan before pursuing one.

Crypto loan alternatives

If a crypto loan doesn’t fit your needs, consider these less-risky financing options:

• Personal loan — If you have good credit, you could qualify for a low interest rate on a personal loan.
• Cash-out refinance — A cash-out refinance of your traditional mortgage loan could be a better choice if you have sufficient equity in your home.
• Home equity line of credit — If you have equity built up in your home, a home equity line of credit (HELOC) may be a safer way to access cash. A HELOC is a revolving credit line that lets you borrow money against your home’s equity.

You can get an idea of how much a personal loan might cost you by using a personal loan calculator. And you can easily compare your prequalified personal loan rates from multiple lenders with Credible.