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Guide & Analytics

Understand Crypto Lending and Borrowing

The post Understand Crypto Lending and Borrowing appeared first on Coinpedia Fintech News

Do you think a paperwork-free process of lending and borrowing is unreal? Also, there is no third-party involvement? Isn’t it something which happens in the ideal world? Well, due to the advancements in the field of crypto technology, everyone is empowered to enjoy financial freedom via cryptocurrencies. Crypto lending is a way for crypto holders to make passive income, while allowing the borrowers to avail of tokens without any hassle. It is a suitable way for borrowers to access finance without getting into the painful way of getting a loan through a conventional bank. 

Let us dive in to learn more about crypto lending and borrowing!

1. What are cryptocurrency lending and borrowing?

Crypto lending involves individuals or organizations borrowing funds by using their cryptocurrency as collateral. The cryptocurrency is sent by the borrower to the crypto loan platform as collateral. The lender , in return, sends the borrowed funds to the borrower. These funds could be used for purposes like trading, investing, or paying bills.  The borrower has to pay the loan back with interest within a specific time period. 

It is an alternative way for people to access funding while making sure that the lender earns interest on the same. Isn’t it a feasible way to shuffle your crypto and earn through it? We will guide you more about it.

KEY TAKEAWAYS
The concept of decentralized crypto lending has brought a great deal of financial freedom to the crypto enthusiastsThe whole process is automated by smart contracts, hence, there is no intermediary involvedLoans are offered at competitive rates which might be lower than traditional credit cards, mortgages and personal loans

2. How does crypto lending work?

Crypto lending involves parties which borrow funds using their crypto as collaterals. 

  • The borrower sends the crypto to the crypto loan platforms, which hold that crypto as collateral.
  • The approved funds are sent by the lender to the borrower.
  • The borrower has to pay the loan back with added interest within a defined period of time.
  • The crypto lending platform charges a fee for its services, whereas the interest rate might vary according to the loan platform and the type of currency.
  • If the borrower defaults, the lending platform could use the collateral to recover the funds.
  • You just need to sign up on a crypto lending platform and deposit your funds.
  • On decentralised exchanges, the interest is always paid in kind.
  • Once you deposit your funds, the investors are believed to add the funds to lend out in bulk, usually in liquidity pools.
  • These investors share interest over the amount you add to the loan
  • In decentralized crypto lending, no third party is involved. Instead, smart contracts work to set the repayment schedule, interest rates, transfer of funds , collaterals and all other details.

This is a simple, seamless process! All you have to do is make good research of all the trustworthy lending platforms!

2.1. Crypto lending rates

Every centralized or decentralized place has a defined rate of interest in the case of crypto lending. The ROI for the lenders is on how the loans have been doing on the platform and the repayment from the borrowers. The usual APR for borrowers is 4% to 20%. For crypto coins, it starts at 3% to 8%, while for stablecoins, it is around 10% to 18%. This might change according to market variations.

 2.2. All about stablecoins

The cryptocurrencies whose value is tied to that of another currency, commodity or financial asset. They aim to provide an alternative to highly volatile cryptocurrencies like Bitcoin. Stablecoin loans can be obtained after offering a crypto asset with high volatility as collateral. With stablecoins, we don’t need to worry about the ups and downs of the market as they are built for stability. It is mostly unadvisable to go for crypto loans in the form of highly volatile cryptocurrencies like Bitcoin and altcoins. The volatility can alter a lot of calculations which might be made beforehand. Hence, stablecoins come to the rescue!

For a stablecoin loan, the loan must be over-collateralized to be a means of insurance for the lender due to the high volatility of the market.

3. Process of crypto borrowing

The crypto-backed loan can be processed by following three simple steps, let us take you through them:

  • The borrower must set the repayment date, collateral coin, and transfer the collateral to the smart contract address
  • The personal loan is attained by them
  • At the end of the period, they repay the loan.

In case of non-repayment, the collateral will be liquidated. There is no need for borrowers to borrow the same coin with collateral. ETH can be used as collateral for USDT borrowing.

4. Types of crypto lending

The major types of crypto lending could be divided into four broad categories:

  1. Collateralized loan

The most popular type of crypto loan is where the borrower must surrender one token as collateral to the lender. Lenders ask for over-collateralization many times. The loan-to-value ratio decides the interest rate and repayment schedule.

  1. Crypto Line of Credit

It works similarly to a typical line of credit in the traditional banking system. There is no set amount of loan disbursed to the borrower. He can withdraw the funds from a credit limit when needed. He can also withdraw a certain percentage of the collateral. Interest is charged on the borrowed amount only.

  1. Uncollateralized loan

This loan is not very popular owing to higher risks of losses for the lenders. With this, borrowers must fill out an application , pass the test , provide identity and get creditworthy to get the loan approved!

  1. Flash loans

Fast loans where the borrower takes the loan and instantly pays it back. Lending platforms give out such loans where borrowers can take advantage of instances like arbitrage opportunities!

5. Things to consider 

Before stepping into the arena of crypto loans, one must consider the following points:

  • Interest rates

Different lending platforms offer different rates. Comparing and finding the best deal is the main game.

  • Repayment terms

One must clearly understand the terms of repayment of the loan. It includes time period, schedule,and penalties for late payment.

  • Collaterals

Check the collateral requirement before considering a particular platform for loans.

  • Credit worth

Some platforms require verification to check your credit worth,so be aware of the same!

  • Security

Always go for a known lending platform with a good track record to protect your collateral.

  • Fees

Take note of repayment fees, processing fees or any other type of fees involved in a particular platform.

  • Tax 

Be very careful while considering a loan as the interest paid could be taxable.

  • Market analysis

Always look out for current market rates and conditions before going for a loan!

6. Types of crypto loaning platforms

There are two types of crypto lending platforms which one can consider:

  1. CeFi Lending platforms
  • BlockFi is a CeFi lending place which offers loans at attractive prices and the borrower deposits collaterals in form of BTC, Litecoin or PAX. Interest rates vary from 4.5% onwards!
  • Coinbase offers a variety of crypto lending products. Users have to sign up and pass some KYC processes.
  • Binance is another popular space which makes lending easier through its website or app.
  1. DeFi Lending platforms
  • AAve allows users to lend funds by using a Web3 wallet. The collateral needs to be submitted by the borrowers first.
  • The Compound offers a liquidity pool in which lenders add funds while borrowers take out the loan.

7. Pros and cons of lending

Pros:

  • The loans are offered at a comparatively lower rates than the traditional credit cards or personal loans
  • Lenders can earn passively  from funds
  • Decentralized platforms don’t even ask for security checks or KYC from the users to transfer the loans. 
  • The loans and interest both get transferred immediately with the maximum protection of blockchain networks

Cons:

  • High collaterals and margins are a big disadvantage
  • There might be a risk of Ponzi schemes since the decentralized market is not regulated
  • Some exchanges might not allow the lenders to access the funds easily.

However, by a proper analysis, all these situations could easily be avoided and a high profit and easy loans could be obtained by the lenders and the borrowers.

8. Risk analysis

There might be some risks associated with crypto loans and we shall make you aware of the same:

  • Margin calls

There might be a risk of collateral falling in its value. When the deposited tokens crash and the overall worth falls below the defined collateral, the lenders ask borrowers to deposit additional funds.

  • Unregulated platforms

The platforms are usually unregulated and do not offer protection against market downfall or cyber thefts.

  • Illiquidity

The funds deposited by borrowers as collateral become illiquid. It becomes difficult at times  to not be able to access the funds.

  • High rate of interest

It is a common scenario that lenders might ask for very high-interest rates. Sometimes users even pay 20% APR against the loans which is extremely high!

9. Platforms offering crypto loans

We have included the most popular platforms for crypto loans:

  1. Nexo

It is one of the leading crypto lending platforms offering instant loans with low-interest rates and flexible repayment options.

  1. BlockFi

It allows users to borrow and lend currencies like Bitcoin and Ethereum

  1. SALT Lending

It offers loans to businesses and individuals , allowing low-interest rates and easy repayment terms.

  1. Crypto.com

Low-interest rates, seamless repayment ways, Crypto.com is all about loans and other crypto-related services.

It is important to know the platform you are considering before setting up your crypto loan journey!

10. The Bottom Line

Lending and borrowing crypto has evolved as a beneficial way to earn passively out of the idle crypto in the wallet. If the whole loaning process is performed responsibly, then it is a fabulous way to get emergency funds. We always suggest studying all the lending platforms before surfing through the loaning game!

11. FAQs

1. Which is the best crypto lending platform?

There is no “best” lending platform. Everything depends on the needs and the preferences of the individuals. Many factors affect the choices of the person, like interest rates, repayment terms, collaterals and much more. 

2. Is crypto lending safe?

With a place like the crypto market, we need to be fully aware of what we are stepping into. Meaningful research and study is very important before starting your crypto loaning cycle.

3. How do we get a crypto loan?

It is a very easy process if you find an authentic centralized or decentralized platform. Register on exchange, choose the tokens to borrow, the type of loan and the kind of collateral. After this, you must ask for a loan once you submit the collateral into the platform wallet. 

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