Compare The Best Crypto Loans
September 2023

How Does a Crypto Backed Loan Work?

A crypto backed loan is a loan in which crypto currency is used as collateral against which money can be borrowed. The loan term can range from just a few days to multiple years. Funds can be borrowed in fiat currencies (e.g. US Dollars, Pounds Sterling), Stablecoins (e.g. Tether), or in other cryptocurrencies (e.g. Bitcoin).

Advantages and Disadvantages of Crypto Loans

When to Use a Crypto Backed Loan

Crypto loans are a very useful way of quickly releasing funds secured against your crypto assets. Many investors have accumulated significant crypto assets over the last few years. These assets can be deposited on a crypto loan platform and then be used as collateral for a loan.

You can use a crypto loan to release the value of some of your accumulated crypto. You could use these released funds to pay down other more expensive debt that you may have such as credit card debt or you could also use the funds to cover some of your everyday living costs.

Another option is use the released funds to buy more cryptocurrencies. This would effectively put you in a leveraged position with your crypto investment portfolio. If crypto prices rise then your overall gains would be magnified, however if prices where to drop then your losses would be larger. Of course you have to factor in the cost of the loan if you plan to use the funds in this way. Given that crypto prices tends to be very volatile we recommend that only sophisticated traders consider putting themselves in a leveraged position. If you are not sure then probably on balance it's best for you to avoid this strategy.

A big advantage of investing in crypto as opposed to other store of value assets such as gold, is the abundance of loan and savings options available for crypto assets. If you buy gold and opt for managed storage rather than taking physical possession of the metal then the storage terms often prohibit the use of the gold as collateral for a loan. In fact you will be paying a monthly fee for the metal to be stored. With crypto you can invest in the asset and use it as collateral at the same time.

No Credit Checks Required

One of the great features of crypto loans is that no credit checks are required. When you deposit your crypto assets on the platform they use these funds to over-collateralise the loan. This means that the value of the loan is significantly smaller than the value of the crypto assets (the collateral). By over-collateralising the loan the platform has sufficient financial comfort that the loan will be repaid. This means that the platform does not need to carry out any further financial checks on you and your credit score will not be affected.

In the event that you are not able to keep up repayments on the loan, the platform can use your collateral to pay off the loan instead.

The absence of any credit checks makes the loan application process very fast and easy. Loan funds can sometimes be deposited with you within just a few hours.

How to Find the Best Crypto Loans

When comparing crypto loans there's a few important points to look out for:

• Interest Rate - Obviously you want to try to keep the interest rate as low as possible. Interest rates vary widely depending on the type of currency borrowed, the loan to value ratio, the term and any loyalty benefits unique to the platform.
• Origination Fee - Some loans require a fee to be paid at the start before the loan is available to you. This is called the origination fee or loan setup fee. Look out for loan setup fees because sometimes the advertised interest rate is low but the setup fee is high meaning that overall you would be better off with a different deal. Some platforms charge no setup fees at all.
• Loan to Value (LTV) - The Loan to Value ratio is the ratio between the loan amount and the collateral amount. The bigger the loan is, or the smaller the collateral is, the higher the LTV is. LTV is way of the lender measuring how risky the loan is for them. Loans with high LTV ratios tend to have higher interest rates and there is a greater risk that the loan could not be fully paid off by the collateral in the event of a default.
• Term - The term is the length of time that you want the loan for. It can be as short as just a few days and as long as several years. Some crypto loans have flexible terms allowing you to extend the loan or pay it off early as you wish.
• Loyalty Benefits - Some platforms offer improved loan terms if you are willing to invest in the platform's own cryptocurrency. For example they may offer lower interest rates or a reduced setup fee in return.
• Minimum Loan Amount - Most platforms specify a minimum loan amount (and a maximum loan amount). If you don't see many matching loans in our search results then try increasing your loan size.

Whilst there is a lot to consider, Definda's loan comparison tool makes comparing loans easy. Just enter the size and amount of collateral that you intend to deposit and the size of the loan that you want to take out into our calculator. We'll then work out the Loan to Value ratio and check the currency type and loan size against our database of available loans. We'll work out the loan setup fee and the approximate monthly payments to make it easy for you to find the best loan for your needs.

Loyalty Schemes

Many platforms offer loyalty schemes that reward users for purchasing and using the platform's own cryptocurrency. In some cases the interest rate may be reduced or the setup fee lower if you own a certain quantity of the platform's own cryptocurrency and have it deposited on the platform. In other cases the setup fee may be reduced if you pay using the platform's own currency.

Overall there tend to be less loyalty benefits on platform loans than there are platform savings accounts.

How does LTV affect loan rates?

The Loan to Value (LTV) ratio is one of the most important tools that crypto platforms use to control their loan risk. Loans with a high a LTV are more risky for the platform because there is a greater chance that that the value of the collateral could reduce to a level that is lower than the value of the loan. If the loan was to then default (i.e. the borrower is unable to repay it) then the platform would not be able to recover the full value of the loan and would face a loss.

To limit their risk, the platform will normally quote a maximum LTV that they are willing to provide for each loan. So if the maximum LTV was 70% and you were to deposit 1,000 USD as collateral then your maximum loan would be 700 USD.

Once the loan has been setup and drawdown the LTV will continue to vary over the lifetime of the loan. This is because the collateral is often in a different currency to the loan. If the collateral is in Bitcoin and the loan is in USD and the price of Bitcoin starts to drop then the LTV will go up because the ratio between the value of the collateral and the value of the loan has reduced.

If the LTV rises too high then the platform is likely to send you a message asking you to take action to reduce the LTV. If you started with a loan at 70% LTV and the due to currency fluctuations the LTV increased to 80% then the platform may contact you to ask you to reduce the LTV back down to 70% by either repaying part of the loan or depositing more collateral.

If the LTV continues to rise and you do not take action then the platform may liquidate the loan in full. This means that they use your deposited collateral to pay off the loan entirely. They will also charge a fee (often substantial) for liquidating the loan. Any funds remaining from your collateral will be transferred back to your wallet. Such an event may also affect your standing with the platform and they may be reluctant to offer you another loan in the future. The bottom line is that you should never allow your loan to be liquidated.

As some currencies are much more volatile than others most platforms will vary their maximum LTV by currency. Currencies with lower volatility such as stablecoins will have higher maximum LTVs.

Some platforms will vary their loan rates by LTV. Whilst they will offer high LTV ratios, if you can reduce the LTV down then they will offer you a lower interest rate in return.

Early Redemption Fees

Some platforms may charge an early redemption fee if you pay off the loan earlier than you anticipated. This is because the platform assumed a certain level of profit would be made on the loan and by paying it off early you are reducing that profit level. Thankfully many of the crypto lending platforms offer very flexible repayment terms and many charge no early redemption fees at all.

Tax Considerations & Benefits

Capital Gains Tax is one of the key driving forces behind the popularity of crypto loans. Many people have made substantial gains in their crypto investments over recent years. If they were to sell their crypto assets they would realise a substantial capital gain which would then be subject to capital gains tax in many jurisdictions.

Crypto loans allow to you to release some of the value of your crypto assets without selling them. Of course, interest will be payable on the loan, but that may still be substantially less than the capital gains tax that would be payable if you had to sell the crypto assets.

Also by retaining the crypto assets you continue to benefit from any future increase in value of those assets that you may be expecting.

Please note that this does not constitute formal tax advice. Tax is a very complex area and if in doubt you should seek professional tax advice before proceeding.

How to Get a Crypto Loan

Signing up for a crypto loan is straightforwards and fast on most platforms. The fact that the platforms do not need to do any credit checks means that the process normally involves almost no forms to fill in.

Once you have found the right loan for your needs using our loan crypto loan comparison tables, then just click through to the platform that is providing that loan. Sign up to the platform in the normal way by providing a username and password.

You will then normally be asked if you would like to setup 2 Factor Authentication (2FA) for your account. 2 Factor Authentication uses a separate code provided by an app on your phone to grant access to your account. All you need to do is install a 2FA application on your phone such as Authy or Google Authenticator. You can then pair this authenticator with your platform account by using the authenticator app to scan a QR code provided by the platform. We highly recommend that you setup 2FA straight away before you forget as it makes your account much more secure.

After your account has been setup you will then need to complete some Know Your Customer (KYC) and Anti-Money Laundering (AML) checks on the platform. Thankfully this process is very straightforwards on most platforms as they have outsourced the process to one of a number of specialists in this area. All you need to do is take a picture of your id document such as your driving license or passport with your phone and a picture of yourself and that will already have completed most of the process. You may also need to submit a picture of a recent document proving your address such as a utility bill.

Once all KYC and AML checks are complete, then just transfer your collateral funds to the platform. The funds could be a crypto currency or fiat currency. Most platforms will provide you with a wallet section where deposit details can be found for each currency type. With crypto funds be very careful that you are transferring the funds to the right type of wallet. If in doubt just transfer a small amount first as a test. With fiat currencies there may be some delay in transferring the funds imposed by your bank. Most traditional banks undertake additional fraud checks on transfers to crypto platforms. These checks may even add several days to the time it takes for the transfer to complete. Unfortunately there is nothing the receiving platform can do to speed up the process. If the funds are not received then it is best to contact your bank.

Once you have the funds received in your wallet on the platform you normally then have to assign the proportion of these funds that you would like to use as collateral for the loan. This may require you to manually transfer the funds to a different section on the site, or you may be guided through the process by applying for one of the loans.

With the collateral funds in place you should then be able successfully apply for the loan. This stage is normally very fast and straightforwards. Simply enter the amount you want to borrow and the term and the funds are often available for drawdown within minutes. To drawdown the loan money simply specify where you would like these funds sending, whether that be to another crypto account or to a traditional fiat bank account.

How to Get a Crypto Loan Without Collateral

Most crypto loans will require you to deposit collateral of value greater than the loan amount. However it is possible to secure a crypto loan without collateral for a very short period of time. This type of loan is called a flash loan and is normally only available for a few seconds. Despite the very short loan term, flash loans can be very useful in certain situations.

What is A Flash Loan in Crypto?

A crypto flash loan is a very short term crypto loan that can be of very high value. The term of a flash loan is typically only a few seconds so the interest payable on the loan is normally extremely small. Very large flash loans are possible as a smart contract checks that you definitely have sufficient funds to repay the loan in full before the loan is granted.

Flash loans are used in a number of different crypto scenarios:

• Arbitrage - If an arbitrage opportunity is identified where a token can be bought in one location at a low price and then sold in a different location at a higher price then an arbitrage opportunity exists. Arbitrage traders can increase their profit by borrowing a very large amount of crypto with a flash loan for a very short period of time as they rapidly buy and then sell the token.
• Collateral Swap - A flash loan can be used to swap the collateral used for a loan from one crypto to a different crypto instantly without the need to close the original loan and then open a new loan.
• Self Liquidation - A flash can be used to instantly liquidate a loan granted in one crypto with the funds used as collateral for the loan in a different crypto. 

Safety & Security Considerations

It is always best to act with an abundance of caution when dealing with all aspects of crypto currency and crypto related platforms. The new generation of crypto savings and lending platforms and generally speaking respectable businesses that are working hard to shake up an industry that is badly in need of reform.

In a sector that is heavily reliant on trust, these new platforms operate with integrity to do things right and properly including seeking the relevant operating licenses and complying with anti money laundering and know your customer compliance checks. Nonetheless there is inevitably some level of risk involved in dealing with crypto platforms and if you are a cautious investor then crypto platforms may not be the right choice for you.

Whilst there is risk associated with crypto currencies and crypto platforms, it is worth keeping in mind that the traditional banking sector is not without its own risk. Traditional banks can and do go bust and with government money printing operating at all time highs, the value of fiat currencies being inflated away is a real concern for many investors.

When taking out a crypto loan your risk is mitigated to some extent as you are borrowing funds and in doing so transferring risk to the lender. However risk does remain relating to the security of your collateral funds, which will always be bigger than your loan.

The primary concern would be that the platform was compromised in some way, say by a hacker, and the collateral funds stolen. To mitigate against this risk, most platforms have outsourced the storage of the bulk of their funds to crypto security specialists such as BitGo. These platforms store the crypto funds in cold storage wallets (i.e. not network connected), with multiple signatures required to release funds from one wallet, and use discrete geographic locations for storage of the wallets. In addition they will offer substantial insurance against theft of the assets.

A further concern would be that your individual platform account could be hacked. This is most likely to happen because you have used a weak password, or one that you have also used for other websites. Always use a long, and unique password and accompany this with 2 factor authentication for extra security. If you are having trouble managing all your passwords then we highly recommend using a password manager such as 1 Password.

When transferring funds to the platform or transferring your loan funds out of the platform always be very careful with the wallet address you are sending to. Make sure that the wallet you are sending to is for the right type of currency and carefully check the wallet address several times. It's often best to just send a small amount first as a test before sending the full amount.

Always be highly skeptical of any messages that you may receive from the platform, especially any messages suggesting that your account details have been changed or any message requiring you to take urgent action. If in doubt, always log in to your account in the normal way (never use links included in the message) and then contact customer services to confirm if any action is required.