What is Crypto Lending?


Introduction

Crypto lending is the process of depositing the cryptocurrency that is lent out to borrowers in return for payments at regular intervals. The payments are typically made through cryptocurrencies that are used in day-to-day lives. The amount is deposited and calculated daily, weekly, and monthly.

Borrowing and lending in stable cryptocurrencies have become one of the latest and most followed processes. It has done the business of borrowing and lending hassle-free and more accessible. The transactions have become more manageable, Helping users to make use of the various networks. Also, the security of data and information is ensured, making the users trust crypto lending.

Crypto Lending Platforms

Crypto lending is the process of lending cryptocurrencies to people interested in borrowing. It asks for reasonable interest rates on the amount borrowed, allowing good opportunities for people who need money. Although it is in the form of cryptocurrencies, it still holds a good amount of value. Therefore, the interest rates are higher than the rates of interest charged by banks. Usually, the rate of interest charged by crypto lenders is between 8% to 20%. Two of the essential crypto lenders in the world are - decentralized crypto lenders and centralized crypto lenders. Both of them require the borrowers to deposit collateral to access the loan.

Crypto lending has become one of the most active sections of the digital field, gaining much popularity in 2020. Since it allows convenient and friendly borrowing and lending without having to struggle with the paperwork and other time taking things, many people who deal in cryptocurrency are finding comfort in crypto lending.

No tax has to be paid in the case of crypto lending. In comparison, people have to pay a considerable sum of money as a tax amount in the case of normal bank loans.

The Components Involved in Crypto Lending

Just like a body or an organization requires its various components to act how they are supposed to, crypto lending also has some components that make its functioning possible. These are - deposits that earn interest and cryptocurrency loans.

The deposit accounts are similar to the bank accounts in their work. The user deposits cryptocurrency, and the lending platform pays interest. The deposited funds can be used by the lending platforms to give to the borrowers or to use them in any other investment.

Offered as collateralized lending products, crypto loans require the users to deposit 100% of the amount and can go up to 150% percent.

What Makes it Similar to Traditional Bank Loans?

The rates of interest and the schemes vary from one plan to the other. It is one of the common factors between crypto loans and bank loans. The plans are different, and the interest rates depend on the platforms acting as lenders. Also, the amount must be paid monthly, similar to a traditional bank loan.

It is an effective way of borrowing money without having to go through the hassle and inconvenience of the various processes required if you take a loan from a bank.

Types of Crypto Loans

There are various types of crypto loans available that you can consider. Here are some of the most common types of crypto loans -

Collateralized Loans

Collateralized loans are considered the most popular type of crypto loan, requiring the deposited cryptocurrency to be used as the collateral for the loan. Most of the platforms make use of over-collateralization. It allows the users or borrowers to access a certain percentage of the deposited amount of collateral. It is typically and usually below 90% of the loan-to-value.

The loan-to-value needs to be lower for the rates to be lower. Also, the lower the interest rates, the lower the chances of being called margins.

Uncollateralized Loans

Although uncollateralized loans are not as popular as collateralized loans, they can sometimes be beneficial. This is because they act similarly to personal loans. Borrowers need to meet specific criteria for their requests to be approved. This is primarily the filling out of a loan application, passing identity verification and completing a creditworthiness review that has to be approved by the authority or the lending platform.

Although they can offer considerable benefits to the people borrowing, they can be a massive threat to the lenders. Since they do not have any collateral to liquidate the loan, the lenders can be in trouble if the contract collapses.

Crypto Line of Credit

With no solid repayment terms and other related conditions, a crypto line of credit can be one of the most convenient ways of carrying out the lending and borrowing of loans in the crypto world. It is a collateralized loan but is different from traditional loans and their ways. It allows the users to borrow a certain amount of the deposited collateral without any solid scheme and plan of repayment. One of the most commendable things about it is that the interest rates are just charged for the amount someone withdraws.

Flash Loans

Flash loans are instant loans available on crypto exchanges and can be borrowed and lent in the same transaction. It does not require a lot of time to be carried out. These are the loans that involve high risk. For example, you are buying a cryptocurrency for a lower price in one market and selling it for a higher price in the other. This transaction is completed in no time.

Conclusion

Saving you all the paperwork and time that traditional bank loans demand, crypto lending has opened doors to digital lending and borrowing. It can help people in need of money who are familiar with cryptocurrencies and want to utilize their experience and investment there. Also, there are various types of loans to give you more options to choose from.

Updated on: 05-Jan-2023

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