Crypto Loans vs Personal Loans
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Difference Between Personal Loans And Crypto Loans
Cryptocurrency is a form of digital currency that that is decentralized and based on blockchain technology. While there are a few cryptos that are more popular and widely accepted than others, there are more than 5,000 different cryptocurrencies in circulation today. Although it was first developed in 2009, the rise in popularity of cryptocurrency began in more recent years. The first crypto coin was billed as “A Peer-to-Peer Electronic Cash System” and was designed to cut out the middleman and facilitate private digital currency transactions. Personal loans have been around much longer than that, and are often more secure to have with a reputable lender or bank. Continue reading to learn more.
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Learn More About Crypto Loans vs Personal Loans
Crypto lending is a new trend that allows consumers to use their digital assets as collateral for loans. Crypto loans are a form of secured personal loans which means that consumers risk losing their collateral if they default on the loan, in exchange for being given access to lending they may not otherwise qualify for.
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What is cryptocurrency?Cryptocurrency is a form of digital currency that that is decentralized and based on blockchain technology. While there are a few cryptos that are more popular and widely accepted than others, there are more than 5,000 different cryptocurrencies in circulation today.
Although it was first developed in 2009, the rise in popularity of cryptocurrency began in more recent years. The first crypto coin was billed as “A Peer-to-Peer Electronic Cash System” and was designed to cut out the middleman and facilitate private digital currency transactions.
What is a crypto loan?Crypto lending is a new trend that allows consumers to use their digital assets as collateral for loans. Crypto loans are a form of secured personal loans which means that consumers risk losing their collateral if they default on the loan, in exchange for being given access to lending they may not otherwise qualify for. Secured personal loans are a common option for borrowers with poor credit. Typically, secured personal loans require either a savings account, CD, or vehicle title to use as collateral. However, now there is the opportunity for borrowers to use their cryptocurrency investments to secure their personal loans. Crypto loans can allow consumers to gain same-day access to cash without a credit check and with competitive interest rates.
Cryptocurrency lending is still a relatively new financing option and can be found primarily through specialized online lenders such as BlockFi, Binance, and Celsius.
Why would you take a crypto loan?There are a number of reasons why individuals might consider taking out a crypto loan.
Crypto loans typically do not require a credit check, making them a fantastic choice for applicants with low credit scores or no credit history.
One major benefit of crypto loans is that interest rates tend to be cheaper than other options for getting fast cash like personal loans and credit cards. This is because they are a form of secured loan which carries less risk to the lender. Cryptocurrency loan rates typically hover around 10%. In addition, since crypto lending takes place entirely online, crypto loans can fund in as little as a few hours.
Crypto loans also make a great financial move for those who want to borrow against the value of their crypto without having to liquidate their investment. For example, if you have $30,000 of Bitcoin that you want to keep holding onto, but you wish to start a business, you can take out a crypto loan to get the funds you need without having to sell any of your digital currency.
How do you pay back a crypto loan?Depending on the lender, you can pay back a crypto loan in various ways including direct debit from your checking account, using a debit card, writing a check, or even paying in cash.
Since crypto loans are personal loans, they are structured as installment loans which require the borrower to pay back the funds over a pre-determined period of time in equal monthly payments. However, this does not mean that you are bound to this payment schedule. With almost any type of financing, you can make extra payments to get out of debt sooner, or even pay off the balance in full at any time. Just keep an eye out for prepayment penalties and fees.
Do crypto loans affect your credit?Just like taking out any other type of loan, taking out a crypto loan can affect your credit if you default on the loan or fail to repay your monthly payments on time. Collection activities and other negative derogatory marks will stay on your credit report for up to 7 years. Be sure to manage the repayment of any type of loan or credit account responsibly so that you can avoid any negative effects to your credit score and your future ability to obtain financing.
What are the advantages of crypto loans?There are many potential advantages of crypto loans, thus why they are rising in popularity in recent years. Like other types of personal loans, crypto loans allow customers to receive unrestricted funding for major expenses and life events that can be paid back over time.
Cryptocurrency lending gives consumers another option to predatory lending practices such as car title loans and payday loans. Crypto loans are a form of secured loans, which means that your loan is guaranteed by an asset. Instead of using a physical asset as collateral, crypto loans allow borrowers to put down their crypto coins as security.
Interest rates on crypto loans remain fairly low as well since your loan is secured with your cryptocurrency deposit. In addition, crypto loans are typically processed entirely online and funded within 1 business day, although funding times may vary.
Most importantly, crypto loans do not have a minimum credit score requirement which makes them an attractive option for many consumers with poor credit scores or who have not yet established credit. Like other forms of secured loans, taking out a crypto loan can be a great way to actually build credit as long as you make all of your monthly payments on time.
In summary, the advantages of crypto loans can include:
No spending restrictions
Low interest rates
Fast funding times
No minimum credit score requirement
What are the disadvantages of crypto loans?There are a few disadvantages to cryptocurrency lending. Since crypto loans are a form of secured loan, you run the risk of losing your coins altogether if you fail to repay your loan.
It is also important to remember that you may not have access or full ownership to your assets during the loan term of your secured loan. This means that you will not be able to sell your current shares of cryptocurrency while they are tied up as collateral with the lender.
In addition, not all digital assets are eligible to use as security for your loan. You may need to exchange your cryptocurrency for one that is accepted by the lender you wish to apply through. For example, you may need to sell your shares of Dogecoin in order to acquire a more widely accepted coin such as Bitcoin or Ethereum.
One final disadvantage of using cryptocurrency to secure your loan is that if the value of your crypto drops significantly, the lender may require an additional deposit (known as a margin call) to maintain your loan-to-value ratio and continue backing up your loan.
In summary, the disadvantages of crypto loans can include:
Temporary loss of ownership of collateral
Must have acceptable digital assets
Value of crypto could drop significantly
Is crypto lending safe?In general, crypto loans are a relatively safe way to complete a digital lending transaction. There is always a risk of market volatility with cryptocurrency investments, and consumers must also deal with the risk of government regulation in the future. In addition, cryptocurrency holdings are not FDIC-insured or backed by any type of government protection.
However, cryptocurrency transactions themselves are very safe and secure and backed up with the latest encryption technology. Block-chain technology is a digital ledger that records transactions and tracks assets across a network. This process is extremely secure because no information can be deleted, and each block of information validates the previous transactions.
The biggest risk of crypto loans is what can happen if you default on the repayment of the loan. Failure to repay allows the lender to liquidate your cryptocurrency to settle your account. This is true of any type of secured loan where banks and other financial institutions can seize the asset(s) you used as collateral if you do not pay off your loan balance.
Can I get a loan to buy crypto?Yes, you can get a loan to buy crypto. When you apply for a personal loan, you can use the funds that you receive for anything that you would like including debt consolidation, major purchases, and investments. In most cases, lenders do not verify what applicants of personal loans are spending their money on.
While you will need to evaluate whether taking out a loan to buy cryptocurrency is a smart financial move, it is theoretically possible to do if you pursue a personal loan.
Should you borrow to invest in crypto?As with many other types of financial decisions, just because you can doesn’t mean you should.
Borrowing money that you cannot afford to pay back is never a wise financial decision. You must take an honest look at your own personal financial situation in order to make this choice.
If you do decide to get a loan to buy crypto, you’ll want to make sure that your interest rate is as low as possible and that you pay off your loan quickly. The more you pay in interest, the more it will eat into any potential profit margin you stand to gain from your crypto trading. The same goes for any potential fees such as loan origination fees.
For example, if you take out a personal loan with a loan term of 3 years and end up paying $1,200 in interest over the lifetime of the loan, but you only earn $1,000 on your cryptocurrency investments, you will end up walking away from the transaction with a loss.
Can you pay loans with crypto?Borrowers may want to know if they can pay their existing loans with cryptocurrency instead of cash. In today’s increasingly digital world, the thought of paying off debt with crypto is an extremely attractive one, especially to younger generations. The short answer is that loans can be paid off with cryptocurrency in some cases.
Thanks to new and innovative digital platforms, there are now options for consumers to pay down some of their debts using cryptocurrencies. For example, student loans can be paid using a new type of financial product known as DeFi loans. These loans allow users to take loans against their crypto holdings, removing the need for investors to sell their cryptocurrency holdings.
In addition, some lenders are also now starting to recognize crypto as a direct form of payment. To find out if this is an option for you, be sure to check with the financial institution who currently holds your loan.
Alternatively, you can sell your cryptocurrency holdings in order to generate the cash needed to pay off your loans. If you are being hit with high finance charges, this can be a smart idea to get out of debt sooner and get back to investing your money in cryptocurrency without throwing away money on unnecessary interest over time. Many financial experts recommend that all debts are paid off before sinking your funds into investments instead of debt payoff, especially if your interest rates are high.
What are risks of cryptocurrency?As a new technology, cryptocurrency trading may be more unstable than traditional forms of investing. Calculating any potential return on investment is very unpredictable. For this reason, many people are wary to deal with cryptocurrencies. In fact, finance experts say that cryptocurrency holdings should not make up more than 5% of any investment portfolio.
In addition, because cryptocurrency transactions are not consistently regulated, there remains a risk of government interference in the future. While it is a primary reason that many people invest in cryptocurrencies in the first place, the lack of a centralized authority can also pose a legal and financial risk to cryptocurrency owners. For example, cryptocurrency coins are not FDIC-insured or protected by any other federal regulation.
Lastly, tax stipulations on cryptocurrencies are constantly evolving, making investment in these assets a headache for many investors.
What is so good about cryptocurrency?While cryptocurrency trading can be volatile, the potential for long-term returns is huge.
The main selling points of cryptocurrencies is that they are secured with block-chain technology, and they are decentralized, meaning that the intention of cryptocurrency is to facilitate private peer-to-peer transactions without the interference of banks or government.
While many traditional investors and financial experts are still leery of this new technology, cryptocurrency is gaining credibility with both financial institutions and consumers as a viable alternative to modern banking and investing. Cryptocurrencies also offer investors a way to diversify their investment portfolios.
Trading with cryptocurrency is easier than ever with the rise of sites like Robinhood and Coinbase designed to help make investing accessible to everyone.
What are alternatives to crypto loans?It is understandable if you have evaluated the risks and benefits of crypto loans and are hesitant to jump onboard. Alternatives to crypto loans include traditional personal loans, other forms of secured personal loans, and payday loans. Borrowers can seek out these options from banks, credit unions, online lenders, and other financial institutions.
Of these, the best choice is an unsecured personal loan. Unsecured personal loans offer borrowers the best access to large amounts of cash without the risk of losing your collateral.
If you have poor credit, you may need to secure your personal loan with another asset such as a savings account, CD, or vehicle title. As with cryptocurrency loans, these loans carry the unfortunate risk of your asset being seized by the lender if you fail to repay the loan on time.
As a last resort, consumers can turn to payday loans to fund small short-term expenses. It can be very easy to get caught in a cycle of reborrowing with payday loans, so they should always be used as a last resort. In fact, approximately 80% of all payday loans are rolled over or reborrowed within just 30 days of the original loan application.
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