Cryptocurrency lending and borrowing have changed the concept of loans in the financial sector. You will be amazed to know that you can get crypto loans at a low-interest rate without any requirement of documents, processing fees and collateral such as home or car. But how do crypto lending and borrowing work?
Through this article, let’s learn what crypto lending and borrowing are and how this system works.
What is crypto lending?
In cryptocurrency lending, an investor or lender lends his cryptos to borrowers in exchange for an interest. In this way, he can earn a passive income with his cryptos without actually selling them.
How do crypto lending and borrowing take place?
Crypto lending allows borrowers to get a loan in cash or cryptos offering collateral in the form of cryptocurrency they own. While in cryptocurrency borrowing, a borrower borrows a crypto loan by paying an interest ranging between 5% to 15%. He deposits some collateral to get a loan that he cannot use until he pays back the whole amount of the loan.
If an investor plans to HODL his cryptos, then crypto lending can be an excellent option to earn some income with idle cryptos.
Crypto lending involves three parties:
Lender: who wants to lend his cryptos or stable coins to earn passive income
Borrower: who needs funds and uses his cryptos to get funds.
Crypto lending platform: a third-party platform that connects borrowers and lenders in one place and provides a secure ecosystem for funds and collaterals.
Now let’s move towards the process of crypto lending.
- A borrower requests a crypto loan through a crypto lending platform by offering collateral in the form of crypto assets which act as security if he cannot repay the loan amount.
- Crypto lending platform accepts his loan request and attaches the collateral. The borrower must repay the entire loan amount for taking back the collateral.
- The lender funds the loan to the borrower through the lending platform.
The borrower pays interest on this loan to the platform, which is given to the lender.
Crypto loans are similar to a mortgage where you use some property as collateral, but in crypto lending, the collateral is your cryptos. Let’s understand through an example.
Suppose you have a Bitcoin worth $5,000, and you need a loan of $1,000 against an interest rate of 7% annually. You went to a crypto lending platform and requested a loan by offering your BTC as collateral. Another person (lender) has $1,000 stable coins and is willing to lend it to you at an interest rate of 7% by keeping your 1 Bitcoin as collateral. Once you pay back the entire loan amount, the lender will release your Bitcoin. In this way, you got funds in a time of need, and the lender earned interest on his cryptos without selling them or doing anything else.
In crypto lending, platforms always ask for the collateral more than the value of the loan. If the borrower does not repay the loan amount, the collateral can be liquidated to secure the lender.
Crypto lending also allows you to get a loan in the form of crypto assets by using fiat currency as collateral.
Advantages of crypto loans
Cryptocurrency owners mainly invest in crypto loans to use them as collateral to obtain crypto loans to use them for their personal benefits. Crypto loans can also help investors to avoid tax on gains.
Through crypto lenders, not only the investors can earn a passive income, but also the borrowers can be benefited by buying an asset at one platform and sell it to another platform.
As the entire process happens on blockchain technology, it is a highly transparent, swift, and flexible process.
These loans are the best option for the unbanked community. You can get a crypto loan either you have a poor or NO credit score.
Future of cryptocurrency loans
Cryptocurrency lending and borrowing have caught momentum, starting a new era of finance. Cryptocurrency serves as excellent collateral because it is easy to liquidate and sell it. It takes only a few seconds to liquidate any cryptocurrency.
The way the cryptocurrency industry is flourishing, we can hope that crypto loans will be one of the crucial sectors in the crypto space.