As digital currency transactions increase, there is a growing market for business owners to use their cryptocurrency as loan collateral. Crypto loans are an alternative lending option that may be benefit your financial situation. Let’s take a moment to understand what a crypto loan is and its advantages and disadvantages.
What Is a Crypto Loan?
Businesses or individuals that have an existing account with a digital exchange, such as OKX crypto exchange, apply for a loan that uses their existing digital currency as collateral. Lenders can provide fiat or digital currency based on the needs of the borrower. As with any collateral-based loan, you must maintain control of the collateral, so you cannot use it for another investment.
What Are the Advantages of a Crypto Loan?
Let’s take a look at the benefits of crypto loans:
- Lenders loan you an amount based on the type and value of the collateral in your digital wallet. Digital coin fluctuates in value based on the current trading rates, so lenders will consider that when developing loan terms.
- Loans are typically 12 months or less, but flexible enough to be just a few weeks to help a business through a cash flow shortage.
- Interest rates are lower than traditional credit card or personal loan rates.
- Your credit history is not scrutinized, so new business owners can use these loans to help establish their credit rating.
- Once approved, funding is provided quickly. Many lenders can fund the loan in a few hours.
What Are the Disadvantages of a Crypto Loan?
As with any lending option, be sure to review the disadvantages of a crypto loan before you commit:
- Crypto loans tend to have higher interest rates, starting at about 9% compared to a traditional loan that can run as low as 3%.
- Prepayment penalties and origination fees can add to the final cost of the loan.
- Lenders monitor your loan-to-value ratio. Because cryptocurrency values fluctuate, the value of your collateral may dip below the lender’s requirements. You can either add additional collateral or the lender may sell your assets to lower your LTV.
- There are many types of digital currency on the market. Be sure to select a lender that accepts the type you own as collateral.
How Else Can Cryptocurrency Benefit My Business?
As with any investment, you can use your existing cryptocurrency as a source of income:
- Day trade digital assets to increase your portfolio.
- Lend a portion of your portfolio to the exchange and receive a high APY in return.
- Invest in a cryptocurrency ATM where users convert their digital currency to cash.
- Sign up for online training sessions about cryptocurrency. Upon completion, many companies deposit a small amount in your wallet.
Cryptocurrency loans and business strategies are a great way to improve your company’s financial strategy. Take the time now to consider how a crypto loan can benefit your company. Having this information in hand before you need the loan can help you save time and money when you need to apply.