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Crypto loans: How it works, risks and rewards
Borrowing against your crypto lets you cash in on its value without selling. But it's riskier than a traditional loan.
Like any other secured loan, you can use a crypto-backed loan to refinance debt, purchase real estate or invest in more crypto — and in this case, without a credit check.
But crypto lenders offer fewer protections than a bank or even financial technology company provides. They don’t offer FDIC insurance, which means you risk losing your collateral in a hack or if your lender becomes insolvent. Crypto’s market volatility also means you often need collateral worth twice the amount you want to borrow. Even then, you’re still at risk of losing your crypto if the market drops.
Before you apply for a loan, weigh the risks and learn what to look for in a lender.
What are crypto loans?
Crypto loans are a type of secured loan that uses crypto assets as collateral. Usually, you can receive the funds in USD or stablecoins like USDT or USDC. Others issue the loan in other types of cryptocurrency.
These loans are similar to mortgages and auto loans that require you to pledge your home or car as security against default, except you pledge your cryptocurrency instead. If you aren’t able to repay what you borrow, you’re at risk of losing your collateral.
Compare crypto loans
Use our table to compare loan options by APR, LTV, accepted collateral and more to get the funding you need without surprise risks or fees. Check Compare to see side-by-side details or select Go to site to start your loan application.
How crypto loans work
Crypto loans work like a cross between a secured personal loan — like an auto loan or home equity loan — and a securities-backed loan. A securities-backed loan is a loan that uses investments as collateral, which change in value during the loan term.
Like secured personal loans, you can find a crypto loan starting at less than $5,000. Typically securities-backed loans are only available in hundreds of thousands of dollars. But like a securities-backed loan, crypto lenders usually require you to provide collateral valued at twice the amount you want to borrow — and have a process to help you avoid default if that collateral changes in value. They also have much shorter terms than a home equity loan or car loan, to help mitigate the risk.
Crypto loan rates may be lower than your typical personal loan. They can range from 0% to 13.9% APR at Nexo, 1% to 8.95% APR with Celsius and 9.75% to 4.50% APR with BlockFi.
Typically, rates hover around 9% — which is around the average rate for a bank loan, according to the Federal Reserve. But if you have bad credit, personal loan rates can get much higher, reaching 36% APR if the lender considers you to be enough of a risk. Crypto loan rates rarely top 15%.
Unlike traditional loans, the rate you receive is also not related to factors like your credit score, income or debts. Instead, rates can vary depending on your term length or the amount of collateral you provide. Generally, the shorter the term and the more collateral you pledge, the lower the interest rate.
Some crypto loan providers offer rate discounts if you stake or use the platform’s tokens as collateral.
Most crypto loan providers only have a minimum loan amount. Some crypto lenders offer loans as low as $50, while others require you to borrow at least $10,000. (Typically, lenders that offer lower loan amounts charge higher rates).
However, you’re limited by how much crypto you can pledge as collateral. Most lenders have a maximum loan-to-value ratio, or LTV.
An LTV expresses the value of the amount you’re borrowing against the value of the collateral you’re using to secure the loan.
To find the LTV ratio, divide the loan amount by the dollar value of your crypto asset.
Many of these alternative lenders offer loans at a maximum 50% LTV for 12-month terms, though outliers like YouHodler advertise up to 90% LTV for popular coins like Bitcoin and Ethereum. A 50% LTV means that for you to borrow $5,000, you’re required to prove that your crypto assets are worth at least $10,000 to secure it against default.
In some cases, the lower your LTV , the lower your interest rate. And so a loan of $10,000 with cryptocurrency valued at $50,000 — an LTV of 20% — could see a more competitive APR.
The main requirement to get a crypto loan is to own enough eligible cryptocurrency to meet the lender’s maximum LTV. You must also live in a state where crypto lending is legal.
Unlike traditional lenders, crypto loan providers don’t check your credit or income. Some may ask you to verify your identity by asking for documents like a photo ID and proof of address. But not all do.
Types of collateral
Some lenders only accept Bitcoin (BTC) as collateral, while others accept a few popular altcoins like Ethereum (ETH) or Litecoin (LTC). Others accept over 50 types of cryptocurrencies as collateral.
Regardless of how many types of crypto a lender accepts as collateral, most only allow you to back your loan with one type of crypto asset. But multi-collateral loans — also known as portfolio loans — may be available with some providers.
Unlike traditional lenders, which determine how much they’re willing to allow you to borrow based on your credit scores or income profile, crypto lending platforms want to see that you own far more crypto assets than you’re looking to borrow.
Many crypto lending platforms allow loan payouts in either US dollars or a coin it supports — up to 40 or more cryptocurrencies with platforms like Binance, MyConstant and Celsius.
What happens if the value of my crypto drops?
If the value of your crypto collateral falls significantly below your loan’s LTV, it could trigger what’s called a margin call. A margin call is when the borrower is required to put up additional crypto assets or pay down the loan to maintain the loan’s original LTV.
You receive a notification by email or text that provides a deadline of hours or days to pledge more crypto as collateral. If you fail to add more assets to the platform or your wallet and your LTV continues to increase, the lender will liquidate your collateral.
Each lender has its own guidelines, but most trigger margin calls when the LTV increases to around 65% and liquidation when the LTV reaches around 85%. Carefully read the terms of a loan’s LTV and understand the margin call trigger before agreeing to any contract.
Some providers offer reverse margin calls if your crypto increases in value, returning a part of the locked collateral back to you. For instance, Celsius releases a portion of your crypto collateral if your LTV drops at least 50% of the LTV noted in your contract.
Volatile collateral makes crypto loans risky
Crypto loans are risky compared to other types of secured loans because the value of your collateral can change so quickly. In some cases, you might only have hours to pledge more crypto before your lender sells some or all of your collateral.
The most dramatic example of this is the 2018 crypto crash, where Bitcoin dropped 80% in value in a matter of months. This table shows how Bitcoin’s value has fluctuated more recently. Other types of cryptocurrency may be even more volatile.
Staying up to date on the value of your crypto at all times is key to staying on top of margin calls — and keeping your crypto while you’re paying back the loan.
How to get a crypto-backed loan
Many crypto loans function like peer-to-peer loans, relying on an intermediary — in this case, a crypto lending platform. Typically you’ll need to follow these steps:
- Calculate how much you can borrow, based on the value of your cryptocurrency, how much you’re willing to pledge as collateral and the lender’s maximum LTV requirement.
- Compare crypto lending platforms based on rates, fees, LTVs, minimum and maximum loan amounts and collateral protection.
- Open an account on the platform and verify your identity — if required — and wait for approval.
- Request a loan by entering information about the amount you’d like to borrow, your collateral and the LTV.
- Deposit your collateral — either into your account wallet or a separate online or hardware wallet, depending on the custodian your lender uses to hold your crypto.
- Receive your funds in the currency you requested. This can take a day or two if you receive your loan in cash.
- Exchange your loan for cash if you received your loan in stablecoin or another type of crypto.
Unlike traditional loans, you may not have to repay your crypto loan through monthly payments. Instead, the full balance is due when the term is up. Read our guide to getting a crypto-backed loan for a more detailed process.
How to lend out your cryptocurrency
Many lending platforms allow you to stake your cryptocurrency for others to borrow, providing you with interest in return. Depending on how much crypto you own, you can earn a healthy income on your investment without needing to sell it.
In most cases, crypto lending platforms you can withdraw from your crypto lending account at any time. But few offer peer-to-peer loans, where you choose the loan amount, rate and term that you like to fund. With a peer-to-peer loan, you must wait for the borrower to repay the loan before you can access those funds.
As with any loan, you can lose money if a borrower isn’t able to repay it or the value of your crypto drops. And any interest that you earn may be subject to capital gains taxes. Talk with a tax professional before signing any contract to learn more about how crypto lending can affect your tax responsibilities.
How to use a crypto loan
Use a crypto loan for any personal expense. Some common ways to use a crypto-backed loan include:
- Investing in more cryptocurrency
- Consolidating high-interest debt, such as credit card debt
- Funding a down payment on a real estate investment
- Covering the cost of crypto mining
Startups and other small businesses can also use crypto loans for working capital and other business-related expenses. Some providers offer funding designed for business — which may be a good option for companies that accept cryptocurrency as payment.
Benefits of crypto loans
Cryptocurrency loans look and act like traditional securities-backed and peer-to-peer loans, but with the benefit of lower APRs, no credit checks and no need to sell your crypto. And you don’t need a traditional savings or checking account to borrow against your assets, which might benefit those who are unbanked or marginally banked.
- Low interest rates. You can expect lower interest rates than you’d find with traditional lenders. We’ve seen borrowing rates as low as 1% with platforms like Celsius. The key is keeping your LTV low.
- Minimal personal requirements. You aren’t subject to a credit check or even income or employment requirements to borrow against your investment. With most crypto lending platforms, you need only to sign up and prove you have the crypto assets needed to back the loan.
- Same-day funding. Most crypto platforms that allow you to buy and sell coins also allow you to borrow against it. Keeping it all on one site makes for nearly instantaneous funding — though it could take up to three business days for funds to make their way to a traditional bank account.
- No tax responsibilities. Crypto loans allow you to unlock a portion of the value of your cryptocurrency assets without triggering a taxable event. That’s because you’re using the assets you’ve stored on a crypto lending platform as collateral for the loan, not selling them outright. It’s similar to how a HELOC works: You aren’t buying or selling the home, rather borrowing against the appreciated value of your property.
Because a loan isn’t technically selling or trading, the amount you borrow or pay back is not subject to capital gains. But if you fail to pay it back, your lender may sell off your collateral, which will trigger a taxable event.
What to watch out for
Crypto loans come with risks you won’t find in traditional finance, including a higher risk of default without the protections of the FDIC.
- Volatility and margin calls. Unlike other secured loans, the value of your collateral — in this case, your cryptocurrency — is at risk of market fluctuations that can result in steep price drops. If they cause your LTV to rise above your platform’s set threshold, you may be required to put up more crypto until it stabilizes to the original LTV. If you can’t, you risk defaulting on your loan and your lender selling off your crypto.
- No FDIC insurance. Unlike a savings account from your local bank, money in your platform or loan account is not insured against exchange failure. If you lose money to a security breach — or if the platform you’re using collapses — there’s no way to recoup your losses.
- No access to your assets. Once you tie up your crypto as collateral, you no longer have the ability to trade or earn interest on it. You won’t be able to cash out if the value of your crypto raises or drops significantly. But check with your lender — you may be able to pay off your loan early if you need to quickly cash out.
- Loan terms vary greatly. Crypto loans come with short repayment terms, similar to payday and installment loans. The most common term is 12 months, although Celcius offers terms of up to three years. And because the minimum loan amount typically starts at $10,000, you’ll have a small window to make monthly payments — or one lump sum payment due at the end of your loan term.
- Not all crypto qualifies. Although larger platforms like Binance accept a wide range of crypto assets, not all cryptocurrency can be used for a loan. BlockFi, a big name in the industry, accepts only three types of cryptocurrency: Bitcoin, Ether and Litecoin.
- Not available in all states. New York and a handful of other states have enacted regulations that restrict who can trade and lend cryptocurrency. Cryptocurrency legislation is pending in thirty-three states and Puerto Rico as of 2021. Make sure the platform you choose is legal in your state before signing up.
- Loans may not be in USD. Not all crypto lending platforms pay out what you borrow in fiat currency. If not, it could require you to convert your crypto from one coin to another multiple times and possibly across crypto platforms before you can get US dollars.
Once your crypto has been converted to USD, it could take a few days for your bank to process and deposit your loan.
Are crypto loans worth it?
Whether or not a crypto loan is worth it to you depends on your level of comfort with the risks compared to the benefits.
If you stand to pay more in capital gains taxes than you would in interest — and you have enough crypto assets to lower your risk of liquidation, a crypto loan may be worth it. Crypto loans may also be worth it if you’ve prioritized hodling on to your crypto assets but also need access to cash to cover an expense.
If you’re paying a high rate on credit card debt or are considering taking out a high-interest loan to cover personal expenses, the low interest rates on a crypto loan may also seem like a better financial decision.
But remember, the risks of crypto-backed loan are much greater than they are with traditional financing. The lack of FDIC insurance and the lack of access to your assets during repayment make mean that you could lose your crypto if your lender is hacked or becomes insolvent. And the volatility of your the value of your crypto assets means that you risk losing it all if the market drops and you don’t have enough collateral to bring up your LTV.
Alternatives to crypto loans
Crypto loans are technically the alternative to traditional lending. So if you don’t have enough invested in crypto to make up for the LTV ratios set by lenders, you can turn to other options instead:
- Personal loans are a safe way to borrow for an expense or to consolidate debt, with amounts of $1,000 to $50,000 — and up to $100,000 with digital lenders like SoFi or Lightstream. You can’t take out a personal loan to buy crypto, however. This is because cryptocurrency is considered a speculative investment, like stocks, mutual funds and bonds.
- Credit cards can be a good choice for small expenses or more regular spending. A card with a 0% APR introductory period can help you save on interest for up to a year.
- HELOCs and home equity loans can help you borrow against the equity you’ve built in your home. Interest rates are often lower than those of personal loans and credit cards, and you can use them to pay off big expenses, like college costs and home renovations.
The APR and terms you qualify for depend on your income and credit score.
If you already own cryptocurrency, a crypto loan could be a way for you to unlock its value without having to sell it, helping you to avoid capital gains. But a volatile market and high risk mean you should carefully consider other options if you don’t have the money to lose.
Learn more about loans, credit cards, trading accounts and other products designed to help you to tap into your crypto assets in our guide to crypto banking.
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