In the history of any investment, loans have played a significant part in building the ventures. Lenders take the advantages of interests earned to expand their business while borrowers use loans to startup businesses, finance their existing businesses, or settle personal needs. Over the decades, lending industries have been improvising the lending business into smoother and safer. It has been in a shorter time than cryptocurrency trading was introduced, and now many investors are shifting their operations to the new digital era. There have been questions if lending cryptocurrency markets could happen and how it can affect the economy. Investors had to try the new lending style. Before giving it a try, get all the necessary details about loan scams from legit sites, such as Bugis Credit.
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What is a Crypto-backed Loan?
A crypto-backed loan is a loan that is collateralized by crypto assets where fiat money, especially US Dollars, are lent in exchange for Bitcoin as a security. It is a fast and straightforward procedure, and the money is directed to the borrower’s account while the bitcoin is deposited into the lender’s wallet. Contrary to the traditional lending model where there must be involvement of the central bank or intermediaries, crypto-backed loans have distinctive features that make them reliable. These features can be elaborated as below;
Crypto-backed loans are much affordable and can be used in various ways that are discouraged by traditional lenders. In traditional lending, the borrower has to give a detailed bit on how to spend the cash. Some activities cannot be facilitated by traditional borrowing. Some of the uses of crypto-backed loans include.
- Refinancing debts
- Diversifying on investments, especially in portfolio diversification.
- Funding another business transaction.
- Investing in real estate.
- Paying for vacation expenses using crypto.
When signing up for the crypto-backed loan, the crypto assets are not taken as sales; thereby, taxes are eliminated during transactions. In this case, the borrower can borrow fiat money and pay less interest than the taxes on capital assets. Two factors can bring the variance in tax liabilities in the crypto-backed loan;
- cryptocurrencies could be treated as property for taxation. Compared to traditional lending where the property is taken as collateral, cryptocurrency loans would not earn capital taxes.
- Depending on the purpose of the loan, taxes can be deducted from the interest. For instance, a loan taken for real estate investment is tax-deductible, while loans for personal uses are tax-free.
In crypto-backed loans, the borrower and the lenders come together, each with their requirements. The borrower deposits the cryptocurrencies into the lender’s digital wallet, whereas the lender deposits fiat money into the borrower’s account. The borrower is offered the loan worth 70% of the crypto market price and at an agreed interest. When the period elapses, the borrower pays back the money inclusive of the interest as the lender transfers back the crypto. Additionally, the loaning process involves a team that reviews the loan application and reports back to the lender within 24 hours. The team will send each party a loan offer that contains;
- Terms and conditions set by individual
- Interest rates that generally begin with 8%
- An origination fee.
- An Annual Percentage Rate is a way of showing the total value over one year.
- The crypto detail essential for the lender to stake a claim against loan default.
After looking at the differences in the transactions of crypto-backed loans, we need to ask ourselves if this kind of lending benefits to both parties. In the traditional lending, the lender and the borrower need to have the agreement signed by either their lawyers or a third party. In this case, the transaction is done on a digital market where only fiat money and crypto are exchanged.
However, crypto-backed loans have exclusive differences that make it beneficial to both the lender and the borrower.
1. Benefits to the Lenders
- There are minimal risks of lenders losing their money since there is a complete repayment of loans. This is due to the largely automated system which ensures direct bank transactions. It becomes more comfortable for the lender to monitor the usage of funds.
- There is an extensive network system globally; thus, the lender can have access to borrowers worldwide, making the crypto-backed loan an international investment.
- Crypto loans are available in all kinds of currency. The lender can deposit any kind of currency into the borrower’s account, and the bank will facilitate its conversion.,
- No maximum loan amount Is set to provide the borrower is within their budget and has enough collateral to offer.
- Any person or legal entity can lend on this platform since there are no limits on minimum requirements, such as business licenses.
2. Benefits to the Borrower
- The main benefit of a crypto-backed loan is that the crypto assets can be preserved by the lender in case the borrower does not raise the full amount of money and interest to repay the loan. The crypto cannot be sold to be sold by the lender as there is no such requirement.
- There is flexibility in implementing the terms and conditions of the loan to fit both parties’ requirements.
- No mandatory requirements to check the creditworthiness of the borrower and the repayment history. This is beneficial to the borrower since they can access loans depending on the value of their collateral.
- The borrower can use cryptocurrencies such as Bitcoin, Ethereum, and Litecoin as collateral for the loan.
- The transaction can be done through any bank globally. The borrower does not need to worry about the type of bank to deposit withdraw fiat money.
The Bottom Line
With the rising value of cryptocurrencies in the global economies, new lending strategies are also on the rise. Investors are looking to invest in a market where there are no direct interventions such as tax and currency control. Investors are also seeking a way to get loans that do not necessarily check their creditworthiness or history repayments. Crypto-backed loans become the current trend in the digital world.