Should You Use Crypto Loans to Fund Your Business
DeFi or Decentralized Finance is the new thing that emerged on the internet. It is safe to say that it changed how we deal with financial services. It eliminates the fees that banks and other financial services charge.One of the top benefits of DeFi is crypto loans. By taking loans against your crypto, you can buy things, invest in real estate or start a business. But should you use crypto loans to fund your business?Well, this is one of the common questions that many have. But not to worry, let me explain everything about crypto loans below:
What are Crypto Loans?
The concept of crypto loans is pretty similar to how traditional banks offer you a loan. Crypto financial services allow crypto investors to borrow loans in cash or cryptos.While in traditional banks, you usually keep your home, car, or another valuable asset as collateral. In the crypto loan ecosystem, you have to offer your cryptocurrency holdings as collateral.Also, even after keeping your crypto holdings as collateral, you will still remain the owner of them. However, you will not be able to use the funds for trading or making any transactions during the lending tenure.Now you might be thinking, who is exactly offering you a loan? Well, there are crypto lending platforms that connect you with other investors.These platforms are targeted to those crypto investors who plan to hold their crypto assets for the long term and are looking to earn interest on their assets.Such investors earn crypto dividends or interest. Also, by lending their holdings, they are generating passive income.
Pros and Cons of Crypto Loans
Pros:
- Low Interest Rates:
- Loan Amount Is Based On Your Asset Value:
- Choice Of Loan Currency:
- No Credit Check:
Crypto loans are not as cheap as a mortgage or car loans. But they work as an inexpensive loan instrument compared to personal loans and credit cards. There are many crypto lending platforms that help you to get crypto loans with an interest rate below 10 percent.
You can get a loan depending on the worth of crypto assets you own. In many cases, you can borrow up to 50 percent of your portfolio value. But yes, there are many exchanges that can allow you to borrow up to 90 percent of your portfolio value. It completely depends on exchange to exchange.
In most cases, you can loan in your preferred currency. For instance, if you are from the USA, then you can take a loan of US dollars. Or you can get a loan in your preferred cryptocurrency that you can later cash in your local currency.
Taking a loan from the bank is a lengthy process. You will need to go through multiple credit check processes, documents verification, or whatnot. But the same doesn’t go with crypto loans. In crypto borrowing, there is no credit check or document verification. Instead, it depends on your crypto portfolio value.
Cons:
- Margin Calls:
- No Access To Your Assets:
- Repayment Terms:
One of the issues with crypto loans is the margin call. It occurs when the value of your collateral drops below a certain threshold. As a result, you will need to increase your holdings to maintain the loan.And since crypto is a volatile market, your crypto holdings may start losing their value. As a result, the lender might sell some of your assets to cut your loan to value ratio.
When you take a crypto loan, you lose access to your holdings. This prevents you from trading or transacting your holdings. This may seem all okay. But problems may arise when your crypto holding price starts to drop or when you need cash in a hurry.
Crypto loans function like traditional installment loans. However, depending on what exchange you have chosen, you may have less than a year to pay back your loan. Also, some exchanges allow you to create your own repayment schedule. But make sure you will be able to pay back what you have borrowed to prevent any issues.
Best Platforms to get crypto loans
Blockfi is the easiest platform to buy, sell and earn crypto. It allows you to earn up to 9.5% APY with a BlockFi interest account. Also, the interests accrue daily and get paid monthly. Also, there is no hidden fee. Plus, you can borrow money at a 4.5% rate.On the website, you will find a calculator for both lending and borrowing. So you will know how much you will earn or pay if you are borrowing funds. And overall, the platform is pretty simple to use.
Gemini is a popular cryptocurrency exchange that also offers you crypto loans. Investors can earn up to 8.05% APY. Also, depending on what crypto you are lending, you will get different interest rates.However, it doesn’t let you borrow funds. But it offers you a crypto credit card. With this card, you can earn crypto rewards with every purchase.It doesn’t have any annual fee or foreign transaction fee. Plus, you change your crypto reward type at any time.And if you’re confused between Blockfi and Gemini, The Money Mongers has done a detailed analysis of both the platforms which can help.
Celsius Network is one of the most popular names when it comes to borrowing crypto. Investors can earn up to a 17% yield when they lend crypto on the platform. Or you can borrow at 1% APR.Plus, it doesn’t charge any fees for borrowing, lending, or transacting funds. Also, on the website, you will find a calculator which will allow you to calculate how much you have to pay back or how much you will be earning by lending your funds.Getting started with the website is also pretty straightforward, and it offers some great features.
Final Words:
So that was all about the crypto loans. All I would say is, yes taking a business loan against crypto can be a good idea. But make sure you understand the risks involved. Also, you are assured that you will be able to pay back your loan amount. Else, you will lose access to your funds permanently.