As cryptocurrencies have become more mainstream there have been a flurry of solutions to help users spend their new digital value.
To make spending these assets seamlessly, recent innovations in some of the best credit cards now allow people to spend their currency anywhere cards are accepted.
Needless to say, this has contributed to further recognition that cryptocurrency is here to stay. Here’s how these cards work today.
Most cards that allow you to spend your cryptocurrency are, in fact, a prepaid debit card not a true credit card. That is to say that you cannot spend more than the current value of the cryptocurrency in your linked wallet. A good example of this would be the Cash Card by Square.
Accordingly when you swipe, dip, or tap your card part of your cryptocurrency is being converted through an exchange into fiat (dollars, usually).
The number of dollars converted will correspond to the value of your purchase. Once the crypto has converted, your money is sent to the prepaid card, which is then passed on to the merchant.
This transaction flow begs the question on what will the next horizon of decentralized finance be? Evidence suggests that could next be loans.
Crypto loans
Because cryptocurrency is considered a “highly liquid asset” many different lenders can accept it as a form of collateral when lending out loans.
For people who are considering long-term investment views, they can take out loans by exchanging cryptocurrency as collateral for USD and generally crypto loans have a lower interest rates as compared to regular loans due to easier application process and lower processing fees.
Also since bitcoin does not carry checks on applicant’s credit so borrowing technically does not affect credit scores.
Also since there is less oversight by the lending organization, people use crypto loans for any purpose they want without needing to officially declare.
Interest rates charged for all borrowers are equal with no distinction as per credit risk, personal risk or institution policies so people with good credit cannot take advantage while those with bad credit can.
In addition, unlike regular loans, crypto loans usually have no prepayment penalties and are open to instant refinancing.
What can you use your crypto loan for?
As with any other personal loan, you can use it for a variety of factors like auto, mortgage, education, and as a short-term business loan for your entrepreneurial ventures.
Vendors who deal with cryptocurrency?
BlockFi is one of the primary dealers who issue loans and allow investors to earn high interest rates(APYs) on their deposits in bitcoins (a form of cryptocurrency). The entire application process from start to finish can take less than 90 minutes and the approval can be decided within 2 hours for certain lenders if contacted during regular business hours.
Unchained Capital is another crypto lender and is similar to BlockFi with the main difference being its geographical market coverage because it offers loans in only certain U.S. states.
There are many other smaller lenders and your best bet is to research other, smaller lenders whose policies might be a better fit for you.
Application process
The application process is universal regardless of which lender you select. Using the company’s website one can sign-up for a loan by providing a name, email address, password, country, state, and phone number, and other personal information wherein most lenders can offer two types of crypto accounts: individual and business.
They must also put in the desired loan amount in USD which will then display the required collateral in bitcoin.
After this, the next day a loan officer will have reviewed and approved (or disapproved) your application) followed by a loan officer with certain conditions being extended to you.
If the applicant then has nothing to negotiate then the USD is transferred to the applicant who must then send the collateral as one of the popular cryptocurrencies like bitcoin, litecoin, and ethereum to the lender’s custodian.
Considerations
As with any other loan, origination fees are consistent at about 1%-2% while the interest charged depends upon the Loan to Value (LTV) ratio which basically considers how much of the asset value is financed by the loan.
Also, most lenders keep track of the value of the volatile cryptocurrency so if the value of the collateral falls, this can trigger a requirement that the applicant put in more collateral to compensate for the decline in value.
These things make crypto loans an attractive potential opportunity for borrowing in place of current personal bank loans, however, the transparency, ease, speed, and security comes at the price of the volatility associated with the collateral in the form of cryptocurrency and before making any decisions, it is essential to research different lenders and their associated conditions on such loans.
