Could you imagine taking out a loan at a low interest rate between 5-15% without any documents, processing fees, or even collateral such as your home or car?
It’s now possible if you have some cryptos in your digital wallet!

How does lending and borrowing in crypto take place?

By offering cryptocurrencies as collateral for loans, crypto investors can borrow money in cash and cryptos. The lender remains the owner of the crypto asset. However, during the duration of the loan, the crypto collateral cannot be traded or transacted.   

It is possible to lend crypto assets and earn interest if a crypto investor plans to HODL (hold on for dear life) with their crypto assets, and they do not plan to sell them anytime soon. Crypto dividends are also known as interest earned. By lending their crypto assets, crypto investors can generate passive income.  

There are many crypto lending platforms and crypto exchanges that offer collateralized loans. Crypto loans work similarly to mortgages and car loans, where collateral is a car or house, while here it’s a cryptocurrency that serves as security for your loan. Peer-to-peer lending is less secure than crypto lending because crypto lending is always overcollateralized.  

How does crypto lending work?

A third party usually acts as a link between cryptocurrency lenders and borrowers. Therefore, cryptocurrency loans require three parties: lenders, borrowers (cryptoasset holders), and lending platforms:  

• Lenders are investors who want to earn passive income by lending crypto, stablecoins, or cash.  

• Crypto lending platforms are third-party platforms that connect and process transactions between borrowers and lenders. These platforms may be autonomous, decentralized, or centralized (operated by a group of people or a company).  

• Borrowers want funds for varied purposes and can use crypto or fiat assets as collateral to borrow.  

Process of crypto lending

The process of crypto lending is as follows:

• Borrowers request cryptocurrency loans through a crypto lending platform.

• Borrowers put up crypto assets as collateral for loans. Crypto exchange accept loans and attach collateral. The borrower must repay the entire amount before taking the stakes back. 

• Through the third party platform, the lender funds the loan to the borrower.

Types of crypto-lending platforms

There are two types of lending platforms, as mentioned below:

• Automated platforms Upon depositing funds in your crypto wallet, automated platforms award you dividends immediately.  

• Manual platforms require the investor to manually stake (block for a certain amount of time) a certain amount of your crypto assets to generate dividends.

Things to consider before engaging in a cryptocurrency lending

Using your digital currency to secure a loan has some obvious benefits. However, there are some downsides as well.  

• Margin calls: If the collateral value falls below a certain level, a margin call occurs and the loan is at risk. The lender may even sell some of your assets to reduce your loan-to-value ratio. In the short term, cryptocurrency prices can be extremely volatile, so this is likely to happen.

• No access to your assets: A loan with an outstanding balance prevents you from trading or transacting with your holdings. In case of a significant drop in currency value or if you need cash quickly, this can be a significant problem.

• Repayment terms can vary: The loans work like traditional installment loans, and depending on the crypto lending program, you may have less than a year to pay them back. In other cases, you can make your own repayment plan. If you are going to use a shorter repayment term, you must determine in advance your ability to pay.

• Not all digital assets are eligible: Your currency may need to be exchanged for an eligible asset, depending on the crypto lending platform you use. If your specific asset is a non-collateral asset and you want to hold onto it, this may not be the best option.

• Interest account funds aren’t insured: Unlike bank accounts, your crypto interest account is not insured if you lend your digital assets. If the exchange fails, you could lose everything.

• Interest account withdrawals can be slow: Generally, you can withdraw crypto interest from your account whenever you want. The funds might not be released for several days, depending on the platform. Your assets could lose value quickly and you won’t be able to trade them, which is very damaging.

Conclusion

You may want to consider crypto lending if you have sizable crypto holdings but do not want to sell them. It’s easy to get a crypto loan, and they don’t usually require credit checks. You may also wish to consider leveraging digital assets by lending them out via a crypto interest account if you intend to hold onto them for a long time. It’s vital to understand the risks of crypto lending before getting involved, especially if the value of your cryptocurrency drops dramatically. Be sure to weigh both the benefits and drawbacks of crypto lending in both forms, as well as all your other options, before making a decision.