Cryptocurrency-backed loans (commonly referred to as crypto loans) have begun to change the global financial sector. For those with sufficient crypto assets, borrowing crypto against those assets held as collateral can be a seamless way to receive extra capital without selling their assets.
Moreover, interest rates on crypto loans are typically more competitive than traditional loans offered by banks and other financial institutions. Since they generally don’t require credit checks, the time it takes to complete a crypto loan application and receive your funds can also be significantly faster.
However, many people ask whether getting a crypto loan without collateral is possible. The short answer is “unlikely” at the moment. While some crypto lending platforms have started offering undercollateralized loans, receiving a loan with zero collateral is unheard of outside a few rare instances.
Why Borrowers Need Collateral for Loans
As a borrower, proving one has enough collateral to repay a loan is the most fundamental part of the application process.
The collateral required for borrowing doesn’t have to be physical cash. If a borrower takes out a mortgage for a home purchase, the borrower’s home is often a form of collateral. Likewise, if a borrower takes out a car loan, the car is usually the collateral.
With traditional loans offered by banks and other financial institutions, prospective borrowers must jump through multiple hurdles. First, the lender might reject a borrower’s loan application if they haven’t built up a credit history or their credit score is too low. Even when lenders approve a loan application, the average approval wait time is 52 days, according to a March 2021 report from Ellie Mae.
While both crypto loans and traditional loans both require collateral, crypto loans are a bit different in that the loan application approval process can be quicker and the interest rates are oftentimes more competitive. Because crypto loans generally don’t require credit checks, borrowers get loan approval and receive funds much faster than traditional loans.
Why Crypto Loans Require Over-collateralization
For crypto loans, borrowers will use cryptocurrencies such as Bitcoin and Ethereum as collateral for the loan.
Borrowers can then freely use the loan capital to purchase a home with crypto, buy a car, and more. Crypto loans help to automate the entire loan process, including loan origination and repayment.
With crypto loans, the lending platform doesn’t need to trust that borrowers will pay back their loans on time because the lending platform knows the loan is over-collateralized.
An over-collateralized loan is one in which the borrower is required to supply crypto collateral up front that has a value greater than the initial value of the loan assets they receive (these values are often calculated in USD).
This rate, known as loan-to-value (LTV), varies for each crypto lending platform. Borrowers receive lower interest rates with a lower LTV (more collateral). For example, at the time of this writing, Abra Borrow offers LTV ranging from 15% to 50% with rates ranging from 0% to 9.95%.
Crypto loans require over-collateralization for a couple of reasons.
First, over-collateralization ensures borrowers are more likely to pay back their loans. That’s because the collateral value exceeds the loan value. If the borrower doesn’t pay back the loan on time, they risk losing their collateral to the lending platform.
Second, the volatility of cryptocurrency prices means that the collateral value may drop significantly as well as quickly at times. Requiring a higher collateral amount helps mitigate some of the risks for lenders.
Risks of Undercollateralized Lending
Some crypto platforms are experimenting with undercollateralized loans, meaning borrowers can receive a loan valued greater than their deposited collateral. On the surface, this concept appears to be more favorable for the borrower. However, undercollateralized loans can actually be quite risky for both borrowers and lenders. Why? Because undercollateralized loans reinsert trust in the loan process.
For some undercollateralized loans, the borrower might not even have to prove they have sufficient collateral available. Further, a loan default could lead to financial losses not only for the lending platform but also potentially other affected users — such as lenders and borrowers that are financially connected to that same platform.
Recent history shows that requiring over-collateralization for all borrowers, from retail users to large institutions, is a more sustainable business model than issuing zero-collateral or undercollateralized loans.
Want to apply for a crypto loan?
Download the Abra app today and apply with Abra Borrow. We offer crypto loans starting as low as 0% APR. Abra Borrow offers speedy loan approvals that don’t require credit history checks.Download App
Established in 2014, Abra is on a mission to create a simple and honest platform that enables millions of cryptocurrency holders to maximize the potential of their assets. Abra enables both individuals and businesses to safely and securely buy, trade, and borrow against cryptocurrencies – all in one place. Abra’s vision is an open, global financial system that is easily accessible to everyone.
Based in the United States, Abra is available in over 150 countries and makes it easy to convert between crypto and a wide variety of local fiat currencies. With over 2MM customers, $7B in transactions processed, and $1.5B in assets under management, Abra continues to grow rapidly. Abra is widely loved and trusted – in April 2022, pymnts.com reviewed and rated Abra amongst the top 5 most popular crypto wallets in the market. Abra is backed by top-tier investors such as American Express Ventures and First Round Capital.
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Abra places clients’ financial objectives and security first. Abra practices a culture of risk management across all levels and functions within the organization.
Abra employs a state-of-the-art enterprise risk management framework that comprises a comprehensive set of policies, procedures, and practices detailing all applicable risk-related objectives and constraints for the entirety of the business. Abra has instituted a complete set of requisite systems and controls that continuously enforce these policies, procedures, and practices to manage all operations, including credit and lending. Abra’s independent Risk Committee comprises experienced compliance, risk, securities, and fraud operations professionals with backgrounds in industries ranging from traditional and digital assets banking, payments, remittance, to fintech.
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