How to Get a Crypto Loan Without Collateral
One way to view cryptocurrency is to see it as a different asset class that can be used to get funds from lenders, especially when you need money urgently. Your Bitcoin can be used as collateral for loans, much like traditional assets like houses, cars, and stocks. There are several digital platforms that provide this service to the crypto community.
In this essay, we will cover everything you need to know about crypto loans and the best crypto lenders on the market.
What is a Crypto Loan?
A crypto loan is a lending agreement in which a trader can receive liquid funds, such as fiat money (cash) or stablecoin, without selling their cryptocurrencies. They use them as collateral for the transaction.
Why would anyone consider taking a crypto loan? You may take out a crypto loan instead of selling your digital assets because you are expecting the value of the assets to increase or because you want to avoid short-term tax on capital gains as you hold them for a long time.
Types of Crypto Loans
There are two types or categories of crypto loans: custodial and non-custodial. Ensure you understand them before you apply for a crypto loan.
Custodial crypto loans (CeFi)
Custodial crypto loans refer to centralised finance (CeFi) loans. In this lending agreement, a central entity is responsible for taking custody of the collateral. That is, the central entity takes control of the private keys of the collateralized assets during the repayment term. Most crypto loans are custodial or CeFi loans.
Non-custodial crypto loans (DeFi)
Non-custodial loans are decentralised finance (DeFi) loans. They require the use of smart contracts in enforcing the terms of the loan instead of a central organisation. DeFi loans come with higher interest rates than custodial loans. Also, in this lending agreement, the private keys of the assets are controlled by the trader.
Non-collateral Crypto Loans: How Do They Work?
A crypto loan without collateral is a lending agreement in which the borrower is not required to put up any of their digital assets as security (collateral) for the lender.
There are two different types of non-collateralized crypto loans: uncollateralized and semi-collateralized. They help to explain how non-collateralised crypto loans work.
Semi-collateralised loans
A semi-collateralised crypto loan requires one party to transfer a small amount of their cryptocurrency to another who needs to add the assets to their current crypto stock to cover a larger loan. This kind of loan can slow the growth of the crypto market because of the locked crypto.
Although semi-collateralised loans are not fully collateralised crypto loans, they are a step in that direction and provide borrowers access to more money than their current assets would typically allow.
Uncollateralised loans
Uncollaterised loans are based on the principle of approval by consensus. This concept gives token holders (or those making the loans) the ability to vote on the creditworthiness of prospective borrowers based on elements including loan amount, loan conditions, on-chain credit data, off-chain credit data, the risk involved, and borrower's historical behaviour.
The purpose of uncollateralized loans is to open the system to new users and non-experts as well as to help the market to grow. In that way, it avoids “idle” crypto and allows users to build their crypto-borrowing reputation and creditworthiness by making timely payments on their loans.
Risks Associated with Non-collateral Loan
Non-collateral loans come with some risks that you need to know of. They range from falling prey to a scam to having to pay very high-interest rates.
- Getting scammed
If you manage to find a non-collateral crypto lender, be on the lookout for warning signs to ensure you are not about to deal with a scammer. Victims of crypto fraudsters have occasionally lost access to their trading accounts and being locked out prevents you from accessing your money.
In order to confirm the validity of cryptocurrency lenders, there are a few questions you should ask. Do the lenders have any history of fraud instances in the media? Does it seem like the loan terms are too good to be true? What are their customer reviews like online?
- High-interest rates
Legitimate cryptocurrency lenders are unlikely to provide loans without collateral since doing so exposes them to the risk of losing money if borrowers are unable to pay back their obligations. However, some crypto lenders would agree to do so in return for very high-interest rates.
- Technical issues
The danger of protocols failing due to a technical issue exists in all cryptocurrency trade. Non-custodial loans have a slightly greater level of risk due to the fact that all DeFi activity is entirely controlled by an algorithm.
- Counterparty risk
Financial institutions, such as traditional banks and neobanks, are required to maintain a certain level of liquidity to protect customers against losing all their funds in an unfortunate situation. But this requirement does not extend to crypto loan providers. Therefore, many crypto borrowers are likely to lose their loans if the market crashes.
- Margin calls/forced liquidations
Lending platforms will issue margin calls or compel liquidations during market downturns to prevent illiquidity. The platform will notify borrowers that they must raise the value of their collateral or run the danger of having their accounts liquidated if a cryptocurrency's value falls to the point where numerous borrowers' LTVs become too high for the platform to support.
In the event that the call is not met, the platform may liquidate sufficient collateral to restore the LTV of an account to its maximum permissible level. The trader will have lost that percentage of their deposit, may have had capital gains or losses, and may have been charged transaction and broker fees in this scenario.
Taxation of Crypto Loans and the Factors Affecting It
Taxes ought not to be paid if a crypto loan is properly managed and the agreements are upheld by both parties. Additionally, using your property as collateral for a loan is not a sale or transfer of cryptocurrency that is subject to taxes because it is seen as property in different jurisdictions.
There are, however, a number of possible crypto loan scenarios that can have an impact on your taxes. The first is crypto loan fees. Providers of crypto loans charge fees (interest), which can be up to 12% APR.
Secondly, failure to repay the loan may lead to the liquidation of your assets by the lender in order to compensate for the loss.
Lastly, when your collateral is liquidated because you could not meet the margin call, you will be charged a capital gains tax if the value increases between when it was purchased and when the lender sold it. This is called “forced liquidation.''
Requirements for a Crypto Loan Application
Compared to the process of applying for a traditional loan, applying for a crypto loan requires relatively little. Credit checks are typically not required; rather, the amount of the loan that will be approved for you depends upon the amount of collateral you are able to provide.
An important thing to note about crypto loan application requirements is the loan-to-value (LTV) ratio, which is the proportion of the amount of the loan to the value of the collateral. If you put up $5,000 worth of crypto as collateral and receive a $3,000 loan, your loan’s LTV ratio is 60%.
FAQ
Yes, you can! But obtaining a crypto loan without collateral is often very risky and costly. The reason is that crypto lenders that provide such loans may be dishonest individuals who wish to steal your assets or identity. So, to avoid becoming a victim of fraud, use popular and trusted loan providers, which include Binance Loans, Crypto.com, Nexo, and Coinbase.
Yes, you can borrow crypto without having traditional money. However, you cannot borrow crypto with no cryptocurrency holdings. You must have an account with a digital platform like a crypto exchange and have some crypto assets in your account to borrow cryptocurrency. Many lenders prefer to offer loans with all or part of your crypto assets as collateral.
It is very easy to get a crypto loan. In most cases, the only requirement for getting a crypto loan is having enough crypto assets to use as collateral. Besides, unlike traditional loans, crypto loan providers do not do credit checks; hence, your credit score will not be affected.
If you fail to pay back a crypto loan, you will not get your collateral back from the lender, who may cash it out or liquidate it.
The best crypto lending services are Binance Loans, Crypto.com, Nexo, and Coinbase. They are safe and secure and can offer you attractive loans.
The best places to get free crypto are crypto credit card providers. They offer an impressive range of services and products that give several perks to users.
While lending and staking are smart ways to make money on cryptocurrency, they are not the same. The main difference between lending and staking is that staking involves verifying transactions and getting rewards, while lending is a system that allows people to collect interest from borrowers.
Reasons Crypto Loan Providers Ask for Collateral
You may ask why crypto loan providers ask for collateral. There are basically two reasons: to use it as a security deposit and to reduce lending risk.
Security deposit
Unlike conventional loans, cryptocurrency loans do not involve credit checks. Instead, lenders use collateral as a security to lower their risk of loss. The collateral will be taken if a borrower is unable to pay back the amount. You can borrow crypto with no credit history or a poor credit score.
Lending risk
Providers of crypto loans also use collateral to determine the parameters of the loan, such as the amount available for lending, payment schedule, and interest rate. The basic idea is that lenders manage a lower risk when collateral is higher. They calculate the LTV to assess each borrower's level of lending risk while still providing loans and maintaining their company operations.
Best Platforms for Crypto Loans
Are you looking for a crypto exchange where you can borrow crypto assets? We have selected the best crypto loan providers on the market to save you the stress of searching for them yourself. They are listed below.
Binance
Register an account on Binance to get access to the Binance Loan platform, where you can borrow over 160 crypto assets and use Bitcoin, Ether, and many other cryptocurrencies as collateral.
The platform offers different loan terms, which are 7, 14, 30, 90, and 180 days. It supports advance repayments in which interest is calculated on an hourly basis and offers attractive interest rates and LTVs.
Aside from providing you with a wide range of assets, Binance Loan has a transparent user interface, supports loans staking for crypto rewards in some collateral options, and allows loaned crypto to be used for trading, payments, and withdrawals in the Binance ecosystem.
Crypto.com
You can borrow up to 50% of your crypto collateral on Crypto.com. It is one of the best digital platforms that allow users to monetise their crypto assets without following the typical process of selling them.
Besides, Crypto.com charges a low annual interest rate of 8% per annum and lets you pay back the loan on your own schedule. You will receive $5,000 in PAX/USDC/USDT/TUSD when you deposit $10,000 worth of cryptocurrencies like BTC, ETH, and CRO.
Nexo
Create an account with Nexo to borrow funds instantly without selling your crypto. You can get from $50 to $2 million. The rate for the service begins from 0% APR, which means there are no monthly repayments.
You do not need to worry about your credit history to get instant crypto credit lines on Nexo. That is because the platform does not run credit checks on borrowers. However, you will need to transfer your assets as collateral to obtain this service.
Coinbase
Coinbase lets you borrow cash up to $1 million by using Bitcoin as collateral. Your loan proceeds can be sent to your bank account or quickly credited to PayPal. The APR is just 8.7%. Also, your credit score will not be hurt because your credit history will not be checked. Therefore, sign up for a Coinbase account now to get started.
Get a Crypto Loan!
The possibility of getting crypto loans is a financing opportunity that individuals and businesses can take advantage of to get cash to meet their needs. Follow our guidelines in this article and create an account with any crypto platforms we have recommended to start borrowing funds with or without using your cryptocurrency as collateral.
