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How Do Cryptocurrency Lending Platforms Work?

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Contributor

Last updated July 16, 2021

The cryptocurrency sector has been growing rapidly over the past few years. 

One of the newest products in the market is crypto lending, which allows investors to borrow against their digital assets. 

Well-organized platforms give loans in exchange for interest, with some providing a high loan-to-value ratio of up to 90% while allowing borrowers to use various digital coins as collateral.

In a nutshell, these platforms lend out crypto that has been invested by others who earn interest. To make economic sense, they lend at a higher interest and give investors a slightly lower interest while the difference is their profit. At the end of the day, everyone using these platforms gets a win.

How Cryptocurrency Lending Platforms Work

1. Open an account with the platform

Before you can apply for the loan, you need to open an account and get a platform wallet to deposit your collateral. This is also the wallet where you will receive your loan before you can withdraw it.

2. Deposit your collateral

This is where things get interesting. The platforms accept different coins as collateral, giving borrowers a wide range of options. Whether you are comfortable using Bitcoins, altcoins, or stablecoins, you will find a platform that accepts any of these as collateral.

3. Applying for the loan

At this point, it is crucial to use a loan calculator to know how much money you will get against your collateral and other fees involved. The most reputable platforms approve loans instantly and aim to reduce any inconveniences to borrowers who might need the money urgently. You will typically get your loan already converted into fiat currencies such as USD or EUR unless you have specified otherwise.

4. Withdraw and use your money

As soon as the loan is approved, you can withdraw it into your bank account. Some people also decide to buy cryptocurrencies using their loans for trading. The latter is possible through an integrated exchange platform.

Benefits of Borrowing from Crypto Platforms

benefits of crypto lending platforms

Have you ever tried to borrow money from a traditional bank? If yes, then you probably know the hassle involved. This new product of borrowing from crypto lending platforms solves many of the hitches experienced in traditional banks.

Easily accessible loans

Anyone can borrow from crypto lending platforms that are reliable as long as they can afford collateral. The issue of credit score no longer matters. 

You will not be required to give personal information such as bank statements and social security numbers to qualify for a loan. These requirements would lock out many needy borrowers, but because they are not needed in this case, crypto loans have become very accessible to borrowers.

According to crypto lenders, these platforms will soon provide the most accessible loans, which is crucial to shaping the decentralized finance (DeFi) sector. Fortunately, many borrowers are looking for accessible funds to expand their investments in digital assets.

Loans with flexible terms

Compared to traditional banks, cryptocurrency lending platforms have more flexible loan plans, interest rates, and repayment periods.

According to the website of one of the best crypto lending platforms, Youhodler, borrowers get a lot of options when applying for a loan. Apart from getting customized interest rates and repayment periods, they also have a flexible loan to value ratio (LTV), a choice of collateral, and the fiat currencies they want to receive their loan in.

The terms and conditions make these platforms very flexible, providing minimum loans, minimum monthly repayments, and more. So, when hunting for an appropriate platform, these are the things to look for.

Fast loans

The application and approval processes are super-fast. Believe it or not, you can get your loan instantly, something you will rarely find in a traditional bank setup. Whether you are new or not to a crypto lending platform, the process of opening an account, adding collateral, receiving your loan, and withdrawing it is pretty fast.

The most incredible thing is that reputable lending platforms approve loans within seconds or minutes. If it has to take longer due to global time differences, internet hitches, or other technical delays, the process will not take more than 3 hours.

And since everything happens from your device, there is no time wastage at all. Investors and entrepreneurs caught up in urgent need of money can rely on this method to take care of their emergencies.

Borrowing in a safe environment

Most people are scared of losing their money to hackers and fraudsters. That’s why it’s important to research the platform you will use thoroughly. 

Make sure your collateral is safe on the chosen platform and check that they use secure websites for transactions and save your collateral in secure environment cloud databases.

Liquidity providing, savings accounts, and earning interest

Enjoy High Liquidity

Creating liquidity pool and pool balancing is a significant role of trusted crypto lending platforms in the current world. They solve major user experience (UX) challenges in traditional peer-to-peer lending platforms. Therefore, borrowers and investors are allowed more flexible withdrawals at any time without having to wait for long.

According to experts, most of these platforms maintain a certain amount of crypto coins. They regulate the amount back to the normal threshold every time it gets lower or higher.

They Provide Crypto Savings and Interest-Earning Accounts

Apart from lending crypto, these platforms also allow investors to save while earning some interest. 

This is how they get crypto coins to lend to borrowers. There is an agreed interest for different digital coins or fiat currency that you save. What’s even better is that some reputable crypto lending platforms accept savings of up to 50+ cryptos and fiat currencies.

The interest rate is usually lower than their lending rates. But for investors who have crypto that they want to save and earn passively, this is a great opportunity. The interest rate ranges from 1% annual percentage rate (APR) to 10% APR in most cases. 

Once you save, you are allowed to control your money because of the high liquidity levels of these platforms.

Enjoy lower borrowing rates and fees

The last benefit to enjoy from the cryptocurrency lending platform is lower rates. 

Although the borrowing interest rates might go as high as 17%, the terms are flexible, which means it is possible to get an affordable interest rate of even as low as 8%. 

On the other hand, the processing fees are lower and affordable, averaging at 2%.

Disadvantages of Borrowing from Crypto Platforms

One of the risks that cryptocurrency borrowers face is the risk of getting scammed. 

From the news and government information, blockchains are still struggling to offer high security to investors. If you do not take your time to choose a cryptocurrency lending platform carefully, you might end up losing your collateral without getting a loan. 

This is the same fear that the lenders go through because borrowers might decide to default on loan repayment.

The volatility of cryptocurrencies is also another concern that both borrowers and lenders face. For instance, if Bitcoin’s value fluctuates rapidly today, the interest rates will be highly affected. Yet, there is no better way to regulate these rates since the coins are decentralized. 

So, different platforms have their own terms and conditions to handle volatility challenges, which might not work so well for borrowers.

You need to be tech-savvy to understand more about cryptocurrency lending platforms. 

Everything is done digitally, and simple mistakes can be costly. Due to numerous changes happening around the crypto environment, one has to keep up with the tech advancement to benefit fully or avoid losing their investment. 

However, if you want to apply for a crypto loan or manage one successfully, there are many crypto consultants whom you can turn to for help.

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