Cryptocurrency has become extremely popular in recent years and many people and businesses have started to embrace it across the world. However, the majority of the digital currencies are highly volatile and their prices are well-known to rise or drop sharply and unexpectedly.
Luckily, with cryptocurrencies, you can do more than just trading them in the hope of making a profit. You can use your crypto as collateral to apply for loans. This could work well for you if you are holding these assets because you can benefit from getting a loan against crypto and benefit more in the long-term, without the worry of the short-term volatility.
How the use of crypto as collateral works
If you are wondering how to get a loan against crypto, we will look into it for you to help you make an informed decision. Similar to a conventional loan that requires you to pledge something of value, say the title document for a plot of land or a vehicle, a crypto-backed loan uses the same mechanism except that you use your digital asset as security to get a loan from a crypto lending platform. Because Bitcoin is the most common crypto, you can easily find a Bitcoin loan site, such as YouHodler that also offers loans on other digital coins too.
Unlike an auto loan or a mortgage where you have to lodge the asset ownership document with the lender, when you take a crypto loan you have to transfer your digital coins to the lender to get the loan. You repay the loan over a defined period and then get your crypto back. Therefore, the lending platform holds your assets to avoid losses if they loan crypto to you and you default on the payments.
While a crypto loan allows you to borrow funds in fiat currencies such as the US dollar or British pound if you need cash to meet financial obligations or invest in another profitable venture, you lose some rights. For example, you lose the right to trade your coins or to use them in transactions. In addition, you should know that if the value of the cryptocurrencies drops in a big way you could have a higher loan than you took out.
How the lenders cushion themselves when taking crypto as collateral
In asset-backed loans, lenders take measures to minimize their losses if the borrower defaults on their repayments. One of the measures is to issue a loan of a lower value than to the assets. The ratio between your loan amount and the market value of your asset is referred to as the loan-to-value ratio (LTV). Most crypto lenders require borrowers to pledge digital coins of almost twice the value of the loan, giving an LTV of 50%. A lower LTV means the borrower has a margin of safety if the crypto prices fall, and their assets are not likely to be liquidated. On the other hand, this also means the borrower gets a lower amount of loan for their crypto assets.
Why should you consider YouHodler to get a loan with your crypto as security?
Although there are many crypto-backed loans lending platforms, YouHodler is one of the best for several reasons:
- You can use your digital coins to get cash loans instantly and even crypto loans. The exchange offers loans in USD, GBP, EUR, CHF, and digital coins like BTC and USDT.
- YouHodler has one of the highest loan-to-asset value (LTV) numbers at 90%, meaning you get a bigger loan for your security as opposed to when you use crypto as security to borrow from other lenders.
- The minimum loan amount starts at $100 so you can get even small loan amounts.
- The platform has many and friendly withdrawal options such as credit card withdrawal allowing you to access funds with your MasterCard or Visa card. You also use bank transfer via SEPA and swift. You can also withdraw as cryptos or stablecoins through the integrated exchange.
- Repayment options are friendly and many, e.g., using credit cards, stablecoins, and via bank accounts.
- You can use the top 20 digital coins as collateral for loans
Advantages of crypto-secured loans
Unlike the conventional loans secured with assets like cars and property, crypto-secured loans have some advantages that make them more attractive for crypto enthusiasts:
- No credit checks
Traditional loans make it necessary for borrowers to have a good credit score to get loans and at favorable terms. Unfortunately, some people have poor credit scores but need credit facilities to invest or take care of various obligations. Such people could find the much-needed relief from crypto loans because they do not consider the credit score, but just the crypto to use as collateral.
- Lower interest rates
Crypto loans may not be as cheap as auto loans or mortgages, but they are far cheaper than personal loans as well as credit cards. It would not be a surprise to get a crypto loan at a rate as low as 10%, which is cheaper than most personal credit facilities.
- Loan amount depends on the crypto value
Mostly, you could get as much as 50% of the value of your crypto coins, and in some cases, you can get even 90% of your crypto portfolio’s value, for example when borrowing from YouHodler.
- Fast loan processing
When using crypto as collateral, once your loan is approved, you can have your funds in a very short time — often within a few hours.
- Chance to earn interest on crypto-savings accounts
The majority of crypto lending platforms such as YouHodler offer interest-earning savings accounts that allow you to save and lend out your digital coins, getting you higher APY, in some cases, of up to 10% or more.
Disadvantages of crypto loans
Despite the many benefits of using crypto as collateral for loans, there are some obvious downsides to the arrangement, including:
- You lose some right to your assets, for example, you cannot trade or transact using them
- Not all digital assets qualify as security for credit facilities
- Margin calls may occur when the value of digital coins drop lower than a specific threshold and the lender calls you to increase your collateral to continue enjoying the loan
Now you know what using crypto as collateral is all about and you can try it. However, you need to be cautious to use the best exchanges to avoid losing your assets to scammers.