How Crypto Loans Work And How To Find The Best Terms

Borrowing a loan from a bank can often leave you stuck paying high interest rates. If you’re looking for a better way to borrow money, consider crypto loans. Here, we discuss crypto loans and how to find the best terms.

A Crash Course On Crypto Loans

When using crypto to borrow fiat currency, the best way to determine if crypto loans are right for you is by looking at the risks and rewards of the process. But first, it’s important to fully understand what crypto loans are.

Borrowing Crypto Loans

Piggy bank with coins with Bitcoin symbol

Like with a traditional bank, crypto holders can partner with exchanges to borrow fiat currency at a set interest rate that will be paid back. This, however, is just about the extent of their similarities.

Crypto loans make it easy for users to borrow without having to sell their crypto. Instead, an account is set up with their exchange of choice, and their crypto is held in the account as collateral until the loan and interest are paid back.

The ability to borrow comes with caveats. Borrowers are limited to how much they can take out in fiat currency based on a percentage of the crypto they have stored with the exchange. This number averages around 50%, but, with Vauld, you can borrow 66.7% of your crypto’s value.

The Role Of Crypto Lenders

On the opposite side of borrowing is lending. When someone lends their crypto, they do so as a way of earning interest on their assets. Investing with a crypto exchange platform, such as Vauld, for a set or flexible period will determine which rates are available to the lender from the crypto exchange.

The immediate earnings of the lender are then used to fund the money taken out by the borrower to be repaid with interest. Lending crypto is ideal for those who are interested in earning passive income and can part with their assets for some time.

The Role Of Crypto Exchanges

Of course, none of these transactions would be possible without a crypto exchange platform at the center. Crypto exchanges like Vauld connect lenders and borrowers to help both parties achieve their financial goals and build their wealth.

Finding a good platform to borrow from can make a huge difference in not only how much the borrower owes in interest, but also in how long they will have to pay that interest back.

How To Get A Crypto Loan

When searching for the right platform to borrow with, it’s important to make sure you are receiving a competitive loan rate and the best terms. This combination will ensure low interest and flexible payment options.

Here are a few steps you can take to secure the best crypto loan for your needs.

Research Rates

Coin with ETH Symbol

When borrowing crypto loans, you will owe a calculated interest rate on top of the amount borrowed. This rate will vary depending on the token and the platform that you decide to use, and exchange platforms will often list their current rates for borrowers.

It’s vital to research platforms and their rates before opting for a specific loan.

Find The Best Terms

Finding the best loan option means determining how much you need to borrow and the length of time it will take to pay it back. Most repayment terms for crypto loans are short, around 12 months or less.

If more time is needed, then it’s critical to find a platform that offers this as an option. Not paying back the loan in the agreed period of time can result in losing the majority of your collateralized assets.

Sign Up With The Right Platform

Once the right platform to partner with has been found, the next step is as simple as signing up, depositing crypto into an account, and applying for a loan. Depending on the amount requested, most loan requests are approved instantly.

The instant approval for a crypto loan might seem odd at first since traditional loans can take up to several days, but the reasoning behind this is simple.

When fiat currency is lent to a borrower, the only thing the platform really cares about is that the borrower has the appropriate amount of funds to deposit as collateral. Beyond that, borrowing a crypto loan does not rely on background checks, credit checks, or anything else.

Categories Of Crypto Loans

The type of crypto loan that a borrower can take out is going to either be a custodial or non-custodial loan. Each has its respective benefits and is based on the financing provided for the assets.

Custodial Crypto Loans

Custodial (centralized finance) loans are the most common type of loans that borrowers tend to think of. An exchange platform will hold the borrower’s crypto as collateral until the loan is paid back. You are unable to access your assets during the repayment process.

These loans, while more affordable than traditional loans, still rely on a great deal of trust from the borrower who is losing access to their crypto.

Non-Custodial Crypto Loans

On the other hand, non-custodial (decentralized finance) loans do not depend on an exchange platform to enforce the loan’s repayment terms, though this typically means it comes with a higher rate. Instead, a contract is used that allows you to keep your assets unless you default.

Aside from rates, another notable difference between these two loan types is that non-custodial loans cannot be traded directly for fiat currency. Borrowers receive stable coins, which can be used to withdraw the desired currency.

Risks And Rewards Of Crypto Loans

Man researching crypto loans

Borrowers face various risks while earning the rewards that come with crypto loans. Some are less common to encounter than others, but each is important to keep in mind.

Risk: Losing Crypto Access

Willingly giving up access to your cryptocurrency is never ideal, but for custodial crypto loans, it is a necessary part of the process of taking out fiat currency.

Since you risk losing the crypto held as collateral, it’s important to avoid using all of your crypto assets to borrow. Having spare crypto available is great not only for trading options but also if a default begins to be a possibility as well.

Reward: Low Interest Rates

Compared to banks, you receive incredibly low interest rates to pay off your crypto loan. Rates for common crypto can fall below 4%, which is hard to believe given that the interest rates on some personal loans are as high as 36%.

Risk: Margin Calls

With certain crypto being more volatile than others, you, as a borrower, might be notified of a margin call if your token’s value begins to plummet.

Margin calls occur when the worth of the collateralized crypto falls below a threshold, causing you to increase your holdings. This helps adjust the collateral’s value and returns it to the initial loan ratio.

Reward: No Credit Checks

Credit score app on a phone

A reward of borrowing through an exchange platform rather than a bank is that you’re able to avoid the hassle of going through extensive credit checks.

In fact, crypto exchanges don’t penalize borrowers for having less-than-ideal credit. As we mentioned before, the platform’s only concern is whether or not you have the crypto to back up your loan.

On the other hand, this reward is perceived as a risk for the lender because they may rely on borrowers with poor credit to pay interest. The good news is that, because the borrower gives up their crypto as collateral, a default means the lender will still receive payment.

Are Crypto Loans Right For You?

Coins with Bitcoin symbol on top of a stack of money

Crypto loans are an easy way to borrow without giving up your crypto assets, but the risks can seem daunting. While borrowers receive the perk of low interest rates for repayment, unexpected margin calls can feel frustrating and even threatening.

Borrowing a crypto loan is not for everyone. Before borrowing, ensure that you will be able to pay the loan back on the agreed terms, and be prepared for a potential margin call.

For every borrowing need, choosing the best exchange platform helps the rewards outweigh any potential risks. To receive the best terms no matter the situation, choose Vauld.

When you partner with Vauld, you’ll experience competitive rates, transparent business practices, and regular upgrades, all while receiving the highest quality customer experience.

Plus, Vauld’s Crypto Circle community creates the perfect space to talk about crypto-related topics or answer questions from on-the-rise tokens to global adoption.

To start borrowing and building your wealth today, sign up with Vauld and never miss out on an opportunity to do more with your crypto.

Latest articles

Related articles