Crypto Loans | The Ascent


The concept of digital currencies has well and truly hit the mainstream. Even if the concept of crypto has become a bit of old hat, however, it’s still spawning all sorts of new ideas.

The latest craze to come out of the crypto world is crypto loans. This newfangled hybrid of lending and digital currency is gaining traction — for better or worse. But is mixing personal loans and volatile cryptocurrency a good idea? And where can you even find crypto loans? This guide will answer those questions, and more.

What is cryptocurrency?

Cryptocurrency is a digital currency aiming to eliminate the reliance on central banking through publicly distributed ledgers known as blockchains. It is traded through online exchange platforms using electronic tokens and keys.

In theory, crypto is the widely distributed, low-cost solution to many of our banking woes.

In practice, crypto is a volatile asset most widely used for speculative investing. But that has been slowly changing over the last few years. More and more retailers are starting to accept cryptocurrency payments. And you can even use it to pay taxes in a few places.

As crypto grows in popularity (and utility) millions of Americans are interested in giving crypto a shot. Studies show that the majority of U.S. adults — 56% of them, in fact — own or have owned crypto at one time. And about 41% of the holdouts intend to jump on the bandwagon soon.

There are even new ways to finance your investments, including crypto credit cards, a product 61% of Americans have shown interest in trying. And now the next new thing, crypto loans, are starting to pop onto the market.

What are crypto loans?

First things first, we’ll discuss what a crypto loan actually is. On the surface, it sounds like a personal loan you use to buy cryptocurrency. But it’s a bit more complicated than that.

Crypto loans are secured loans offered by some crypto brokers and wallets. They use your existing cryptocurrency assets as collateral. In other words, crypto loans are secured loans that let you stake crypto you already own to reduce your interest rates and customize your repayment.

Related: Best crypto apps and exchanges

For example, a crypto loan might let you borrow up to 50% of the value of your crypto deposits. You can use the money you borrow to invest in additional cryptocurrency. In some cases, you can withdraw the borrowed funds as cash to fund other personal or business purchases.

What are crypto flash loans?

Flash loans are a niche type of loan unique to the crypto market. They are unsecured loans that can be taken out for a single crypto transaction. They’re called flash loans because that’s a fair description of their duration, as flash loans need to be repaid before the transaction ends. Flash loans are mostly used for arbitrage opportunities (when a crypto is valued differently in two markets at the same time). They are expert-level tools and not for the average investor.

Is it a good idea to buy crypto with a loan?

This is the key question you should ask yourself before getting a crypto loan. Because while there are a few pros to the process, there are also a number of cons.

Pros of crypto loans

There are a few benefits to crypto loans that may appeal to some borrowers:

There’s no credit check. Crypto loans are secured by your existing crypto, and they never exceed the value of that collateral. As such, you won’t need to undergo any kind of credit check in most cases. As long as you have an active wallet account with the exchange and enough collateral, you can qualify for the loan. This is a big contrast to traditional loans, which can be hard to get with no credit.

Interest rates can be fairly low. With regular personal loans, a good interest rate depends on your credit history and loan terms. With crypto loans, your credit won’t matter. And because they’re secured loans, they tend to have fairly low interest rates. Some offer rates below 10%.

Time between application and funding can be hours. You won’t be dealing with traditional banks or underwriters. Plus, your loan is fully secured. This means you can go from application to approval to funding all on the same day (though this may vary among lenders).

Cons of crypto loans

All loans have cons, but crypto loans have a set of drawbacks as unique as they are. Consider all of these potential problems before agreeing to a crypto loan.

You can’t touch your collateral. Any crypto you pledge as collateral for your loan becomes dedicated to that purpose. As long as you owe money on your loan, those assets are out of your direct control.

Interest is accrued in dollars. Like any other loan, crypto loans accrue interest. And that interest isn’t based on the value of a given crypto. Instead, if you’re in the U.S., it’ll be a set rate in U.S. dollars. And you’ll need to repay all the interest that accrues as a part of repaying your crypto loan.

There’s often a low LTV (loan-to-value ratio). Most crypto loans have a fairly low LTV. We’re talking as low as 50%. So, if you pledge $1,000 worth of crypto, you could wind up with a loan as low as $500. You may be able to get a higher LTV with some lenders, depending on what you’re doing with the loan proceeds. But expect to pay higher interest rates for a better LTV.

If crypto prices fall, you’ll need more collateral. Since you’re using a volatile asset as collateral, there’s a good chance the value of that collateral will decrease over the course of your loan. If the value drops, the crypto lender can require you to pledge additional assets to cover the difference.

Loan repayment terms can vary significantly. Some crypto loans can go on more or less indefinitely, as long as the value of your collateral holds. Other loans have repayment terms of hours, days, or weeks. Make sure you know how long you have to repay your loan so you don’t get caught in a bind.

Crypto is highly volatile. We touched on this above, but it’s worth mentioning again. Cryptocurrency is not a stable investment. While there can be some very high highs, there are also extremely low lows. Whether you’re talking about the value of your collateral, or about the value of investments you make with the money from a crypto loan — it’s all very risky.

Alternatives to crypto loans

There are two main reasons to take out a crypto loan:

  1. You want to further invest in crypto.
  2. You want cash for something else.

If your end goal is to buy more crypto, be wary of alternatives. Anything that involves taking on debt or leveraging assets to purchase crypto is going to have many of the same risks as using any type of crypto loan.

But if you’re just after a loan for something else, such as home repairs or investing in your business, then some of these alternatives may be realistic options.

Traditional bank loans

Although they’re not as in-vogue as crypto loans, the traditional bank loan is the tried-and-true method of financing. So long as you have good credit, you can usually get decent rates and a consistent repayment schedule. What’s more, a personal loan from a bank is typically unsecured, so you won’t be reliant on your investments maintaining a stable value to keep your loan viable.

Learn more: How do personal loans work?

The money from a personal loan is deposited into your bank account. From there, you can use it to finance whatever you need. If you’re going to use it to finance an investment, make sure you understand the risks involved. This goes double for a volatile investment like crypto.

Peer-to-peer loans

This alternative to borrowing money from the bank is a newer product — though not nearly so new as crypto loans. Peer-to-peer loans are essentially like traditional personal loans, except they’re not funded by the bank. Instead, they’re funded by individuals who are essentially investing in the loan.

Related: Best peer-to-peer lenders

Peer-to-peer loans can sometimes be easier to get than traditional loans, since the underwriting process is different. However, they do come with all the same risks as any other loan, including interest fees.

Zero-interest credit cards

For those looking to finance non-crypto purchases, a credit card with a 0% intro-APR offer can be extremely useful. You can use it to make purchases like any other credit card. The difference is that you won’t accrue interest on your purchases during the intro-APR period. (You will still need to make your minimum required payment every month, however.)

This method has a couple downsides:

  • You need at least good credit. Most 0% intro-APR offers are on cards that require you to have good to excellent credit to qualify.
  • The interest rate reverts to the go-to rate at the end of the intro period. The standard APR on a credit card is often very high, so be sure to pay off your balance before the introductory period ends.

On the other hand, if you’re looking for a way to finance crypto purchases, this method may not be the answer. Here are some of the issues:

  • Ability: Some credit card issuers and networks prohibit using your card to purchase crypto.
  • Cost: Most crypto exchanges charge an extra fee to buy crypto with a credit card. There’s also the potential cash advance fee (below).
  • Interest: Your card issuer may count crypto purchases as cash advances. In this case, not only will you need to pay a cash advance fee, but cash advances aren’t typically included in those 0% APR intro offers. In this case, you’ll start accruing interest at the standard rate right away.

If you intend to use your credit card to purchase crypto, be sure you know what you’re getting into. Research whether the purchase is even allowed, as well as how much it will cost you, before you make your purchase.

Learn more: Buying cryptocurrency with a credit card

Credit card rewards

If you’re looking for ways to fund the purchase of more crypto, using your credit card rewards is probably the least risky. There are two ways to go about this, depending on the kind of rewards credit card you use.

The most straightforward way is if you have a crypto rewards credit card. In this case, your purchase rewards are typically automatically used to purchase the crypto of your choice. Like any other credit card, you can even avoid paying interest fees if you pay off your balance in full before your due date.

Related: Types of cryptocurrencies

If you have a regular cash back rewards card, the process is slightly more complicated. In this case, you’ll need to cash out your rewards. Then, you can use that cash to purchase crypto through a crypto exchange. Choose an exchange that doesn’t charge investing fees to get the most crypto for your money.

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