An unexpected expense comes up. Selling crypto isn’t ideal. It could trigger taxes or disrupt a long-term strategy. But there’s another option: borrowing against digital assets instead of liquidating them. A crypto-backed loan provides cash while keeping investments intact, offering liquidity without giving up potential gains.
Crypto loans let you unlock the value of your digital assets without selling them. They can support a range of needs, from smaller loans for everyday expenses, like groceries or rent, to larger loans for starting a business or refinancing debt.
In this guide, you’ll learn:
- What crypto loans are and how they work.
- The different types of crypto loans, including hypothecated and non-hypothecated options.
- How to apply, manage collateral, and avoid common risks.
Whether you’re looking for liquidity or want to explore the benefits of crypto-backed lending, this guide has you covered.
What is a Crypto Loan?
A crypto loan lets you borrow money, such as fiat currency (eg, USD), by using your cryptocurrency (eg, Bitcoin) as collateral. You pledge your digital assets to secure the loan, similar to how traditional loans use cars or homes as collateral. This way, you access cash while keeping your crypto for potential future gains.
This differs from borrowing cryptocurrency itself, where you take out crypto tokens like Bitcoin or Ethereum. Those loans are typically used for trading strategies or earning passive income and must also be repaid with interest.
The blog will focus on using your crypto as collateral for a loan.
Read more: What are Bitcoin Loans, and How Do They Work?
How Do Crypto Loans Work?
Crypto loans let you use your digital assets as collateral to access liquidity without selling them. Here’s a step-by-step guide to how they work:
Choose a Lending Platform
Select a trusted platform, like Ledn, known for secure systems and borrower-friendly terms. Compare options to find the best fit for your needs.
Read more: 15 Best Crypto Loan Platforms In 2024
Decide on Hypothecation
Choose between a hypothecated loan, where your crypto is lent out, or a non-hypothecated loan, where your collateral remains secure in a third-party custody account.
Hypothecated Loans: Typically offer lower interest rates but involve greater lender control over your collateral.
Non-Hypothecated Loans: Your collateral stays in independent custody, adding an extra layer of security, though these loans may have higher costs.
Read more: Rehypothecation in Crypto Lending - A Simple Guide
Check Interest Rates and Terms
Crypto loans may have fixed or variable rates:
Fixed Rates: Stay the same throughout the loan term.
Variable Rates: Adjust based on market conditions.
Review the repayment schedule and any fees. Loan terms can range from a few months to several years.
Apply for the Loan
Submit your application. The platform will assess your collateral and determine the Loan-to-Value (LTV) ratio. LTVs typically range from 50% to 90%, with higher ratios often resulting in higher interest rates.
See what you could borrow with this Loan Calculator.
Deposit Collateral and Receive Funds
Once approved, deposit your cryptocurrency as collateral. Funds are then paid out in fiat or stablecoins 🙌.
Make Repayments
Follow the agreed repayment schedule. Some platforms allow early repayment without penalties, which can save on interest. Payment terms may vary. Some require monthly payments, while others expect the full amount at the end of the term.
Monitor Collateral Value
Crypto values can fluctuate:
If the value drops: You may face a margin call, requiring more collateral or partial repayment.
If the value rises: Some platforms allow you to withdraw excess collateral or increase your loan.
Repay and Retrieve Collateral
Once the loan and all fees are repaid, your collateral will be returned. If you default, the platform may liquidate your assets to recover the debt.
Check Tax Implications
Borrowing against crypto isn’t usually taxable since you’re not selling your assets. However, if collateral is liquidated, you may incur capital gains or losses. Consult a tax expert for guidance.
Crypto Loan Example
Collateral: 1 BTC worth $100,000
Loan-to-Value (LTV) Ratio: 50%
Loan Amount: $50,000
Loan Term: 12 months
Fixed Annual Interest Rate: 8%
Monthly Payment Calculation:
Principal: $50,000
Annual Interest: 8% of $50,000 = $4,000
Total Repayment Amount: $50,000 + $4,000 = $54,000
Monthly Payment: $54,000 ÷ 12 = $4,500
You would make monthly payments of $4,500. Upon fully repaying the loan, your 1 BTC would be returned. If BTC’s value dropped significantly and you failed to provide additional collateral, the platform could liquidate part or all of your BTC to cover the loan.
Types of Crypto Loans, Explained
Read more: How to Borrow Against Crypto - Decoding Crypto Loans
Collateralized Crypto Loans
These are the most common type of crypto loans, requiring you to pledge your digital assets as collateral. The loan amount is typically a percentage of the collateral's value.
Uncollateralized Crypto Loans
Also known as unsecured loans, these do not require collateral. They are riskier for lenders, so often come with higher interest rates.
Read more: Crypto Loans Without Collateral - The Complete Guide
DeFi (Decentralized Finance) Crypto Loans
DeFi loans use smart contracts to facilitate lending and borrowing without intermediaries. These loans offer more transparency and lower fees but come with their own set of risks.
Read more: Cefi vs Defi - Key Differences Explained
The Benefits of Crypto Loans
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Crypto loans offer several advantages, including:
Rapid Liquidity
Crypto loans are a way to access cash or other cryptocurrencies without the need to sell your digital assets. This allows you to keep your digital asset collateral while still meeting liquidity needs.
Speed and Ease
The approval and funding process for crypto loans is generally much faster than traditional loans. With automated platforms and minimal paperwork, you often receive your funds within minutes to hours.
Competitive Rates
The interest rates for crypto loans are often lower than unsecured loans like credit cards or payday loans. The requirement to provide crypto collateral reduces the lender's risk, which is reflected in relatively lower interest rates. This can translate to significant savings over the loan term, making these loans a cost-effective borrowing option.
Flexibility
Crypto loans offer considerable flexibility in how you use the borrowed funds. Whether you need the money for investment opportunities, personal expenses, or business needs, there are typically no restrictions on the usage of the loan.
No Credit Checks
Many crypto lending platforms do not require credit checks. This makes crypto loans accessible to individuals with poor or no credit history, as the loan is secured by the value of the cryptocurrency collateral instead of your creditworthiness.
Global Accessibility
Crypto loans are available to people around the world, regardless of their local banking infrastructure. This can be particularly beneficial for individuals in regions with limited access to traditional financial services.
Ownership and Control
By using crypto loans, borrowers can maintain their digital assets while leveraging them for liquidity. This means they can benefit from any future price appreciation of their cryptocurrency holdings.
The Risks and Challenges of Crypto Loans
Despite the benefits, crypto loans also come with several risks and challenges that borrowers should be aware of:
Volatility
The value of cryptocurrencies is volatile. If the value of your collateral drops significantly, you might face a margin call, requiring you to add more collateral or repay part of the loan. Failure to do so could result in the liquidation of your assets at a loss.
Regulatory Risks
The regulatory environment for cryptocurrencies is still developing and can vary by jurisdiction. Changes in regulations could impact the availability of crypto loans, the legality of certain practices, or the obligations of both borrowers and lenders. Staying informed about regulatory changes is crucial.
Security Risks
When you deposit your cryptocurrency as collateral, it’s typically held by the lending platform. This introduces security risks, as the platform could be vulnerable to hacking, fraud, or mismanagement. Choosing a reputable platform with strong security measures will mitigate these risks.
Platform Reliability
The reliability and reputation of the lending platform are crucial. Some platforms might have poor customer service, lack transparency, or even become insolvent, which can affect the security of your collateral and the terms of your loan.
7 Things You Should Know Before Applying for a Crypto Loan
Here are the key terms, rates, and conditions you’ll encounter.
1. Annual Percentage Rate (APR)
The APR reflects the total cost of your loan, including interest and fees. A lower interest rate doesn’t always mean a lower APR if additional fees apply. Calculate the full borrowing cost before committing.
2. Loan Duration
Loan terms impact your repayment and costs:
Shorter Terms: Lower interest rates but higher monthly payments.
Longer Terms: Higher interest rates but more manageable monthly installments.
Choose a duration that fits your budget and financial goals.
3. Fees
Different platforms charge various fees that can affect the total cost of borrowing, including:
Origination Fees: Charged upfront as a percentage of the loan.
Transaction Fees: Applied for processing payments or other services.
Late Payment Fees: For missed repayment deadlines.
Early Repayment Penalties: Charged for paying off the loan early.
Compare fees across platforms to find the most cost-effective option.
4. Loan-to-Value (LTV) Ratio
The LTV ratio measures the loan amount against the value of your collateral:
Higher LTV Ratios: Higher interest rates and increased risk.
Lower LTV Ratios: Lower interest rates but require more collateral.
Understand LTV requirements to manage your collateral effectively.
5. Crypto Loan Interest Rates and Fees
Fixed vs Variable Interest Rates
Fixed Rates: Remain constant throughout the loan term, offering predictability.
Variable Rates: Fluctuate based on market conditions, potentially lowering or increasing your costs.
Platform Fees and Charges
Be mindful of additional costs, such as origination fees, late payment penalties, and transaction fees, as these can add up quickly.
Tax Implications of Crypto Loans
Taking out a crypto loan is generally not a taxable event. However, if your collateral is liquidated, it could result in a taxable gain or loss. If you’re unsure, consult a tax professional to understand potential liabilities.
6. Collateral Management
If the platform rehypothecates your collateral (uses it for its own purposes), make sure you understand the associated risks, as this could affect how quickly or securely your collateral is returned.
Read more about rehypothecation in Crypto Lending here.
Ledn offers a variety of transparent custodial loans that allow clients to choose the use of collateral that best suits their risk profile.
Read more about: Ledn Custodied Loans
7. Transparency and Platform Reputation
Choose platforms with clear terms, transparent practices, and strong asset security. Review user feedback and check regulatory compliance to avoid hidden risks.
How to Get a Crypto Loan in 12 Steps with Ledn
If you think a crypto loan could work for you, Ledn is a secure, reliable option. Securing a loan is straightforward.
Here’s how it’s done:
1. Assess Your Financial Circumstances
Before applying for a crypto loan, evaluate your financial situation. Consider your income, expenses, and existing debts to ensure you can comfortably manage a new loan. Factor in the volatility of crypto and how market fluctuations might impact your loan's terms. Define the purpose of the loan, set a realistic borrowing limit, and plan for repayments.
2. Create or Log Into Your Ledn Account
If you don’t already have a Ledn account, visit the Ledn website to sign up. Provide the required personal information and complete the verification process. If you already have an account, log in using your credentials.
3. Go to the Loans Section
Once logged in, navigate to the loans section. Ledn offers several types of loans, so choose the one that best suits your needs.
4. Select the Type of Loan
Decide whether you want a Bitcoin-backed loan or another type of loan offered by Ledn. Your choice will depend on your financial needs and goals.
5. Enter Loan Details
Input details about the loan you're seeking, such as the amount you want to borrow. Specify the collateral you're willing to provide. Choose the type of collateral management:
- Standard Bitcoin/ETH-backed loan: Ledn rehypothecates your collateral to lower client interest rates.
- Custodied Bitcoin/ETH-backed loan: Collateral is posted to an institutional USD funding partner and held in custody with qualified custodians and banks, ensuring it cannot be rehypothecated.
6. Review Loan-to-Value Ratio (LTV)
Ledn will provide information on the LTV ratio for your loan. This ratio indicates the loan amount in relation to the value of your collateral. Ensure you are comfortable with this ratio and understand its implications. The starting LTV for all Ledn loans is 50%.
7. Submit Loan Application
After entering all necessary details and reviewing the terms, submit your loan application.
8. Wait for Approval
Once submitted, your application will be reviewed. Ledn typically responds within a day, either approving the loan, asking for additional information, or detailing the next steps.
9. Review and Accept Loan Terms
If your application is approved, Ledn will provide the loan terms. Carefully read through these terms, including interest rates, repayment schedule, and any fees or penalties.
10. Deposit Collateral
If you agree to the terms, deposit the collateral. Follow Ledn’s instructions to transfer your crypto to the designated wallet.
11. Receive Funds
Once your collateral is received and verified, Ledn will disburse the loan amount to you, usually within 24 hours. The funds can be in fiat currency or stablecoins, depending on your choice.
12. Repay Loan
Pay back the loan at the end of the term, or earlier if you like.
Why Use Ledn For a Crypto Loan?
Ledn offers secure, transparent, and user-friendly crypto loans with competitive interest rates.
Flexible Loan Terms
There are no monthly payments, no penalties for early repayment, and full flexibility to refinance at any time.
Loan Options
Standard Bitcoin-backed Loans
These loans rehypothecate collateral for lower interest rates.
Custodied Loans
Collateral is held with an institutional USD funding partner, and is not rehypothecated, reducing credit risk. Though interest rates are slightly higher (2-3%), this option offers more security.
Read more: Rehypothecation in Lending: What Is It, And How Does It Work?
B2X Loans
This unique offering combines a Bitcoin-backed loan with the purchase of an equivalent amount of Bitcoin. Upon repayment, borrowers receive both their original collateral and the additional Bitcoin.
Transparency and Client-First Philosophy
Ledn ensures clients are always well-informed about their financial dealings through monthly Open Book Reports. It provides Proof of Reserves and has never paused client withdrawals since it was founded in 2028.
Fees are transparent, making financial planning straightforward and predictable.
Security and Trust
Ledn is backed by renowned investors such as White Star, 10T Holdings, Kingsway, and Coinbase. It focuses on reputable assets like BTC, USDC, USDT, and ETH, providing a potentially less volatile selection.Ledn uses AES-256 encryption, mandatory 2FA, and partners with BitGo for asset storage, ensuring assets on the platform are secure.
Crypto Loan FAQs
How do I choose a crypto loan platform?
Look for platforms with strong security, good reputation, and clear terms and conditions.
What happens if the value of my crypto collateral drops?
If the value of your collateral drops significantly, you may need to deposit more crypto or risk liquidation.
Can I get a crypto loan without collateral?
Yes, through uncollateralized loans, but expect higher interest rates and stricter approval criteria. Uncollateralized loans are not available on Ledn.
Read more: Crypto Loans without Collateral
Can I use a crypto loan to buy more cryptocurrency?
Yes, you can use the funds from a crypto loan for any purpose, including purchasing more cryptocurrency.
Conclusion
Crypto loans offer a smart way to access funds without selling your digital assets. By understanding the process, loan options, and potential risks, you can unlock the value of your crypto while retaining ownership.
Ready to get started with a crypto loan? Open an account with Ledn.
Disclaimer
This article is sponsored by 21 Technologies Inc. and/or its subsidiaries (“Ledn”) and is for general information, discussion, or educational purposes only and is not to be construed or relied upon as constituting legal, financial, investment, accounting, tax, estate-planning, or other professional advice or recommendation. Please read Ledn’s full Risk Disclosure Statement and Disclaimers.
