How Does a Crypto Loan Work?

Crypto loans are on the rise, with loan originations topping well over $100 billion in 2021, according to a Bloomberg report. 

Unlike traditional loans —  which base approval on your credit history —  crypto loans offer a much faster approval process and use your crypto holdings as collateral. What’s more, crypto loans usually have lower interest rates than traditional loans. 

As interest in this new financial tool increases, education about crypto lending will need to increase to meet the growing number of crypto borrowing products available to consumers. 

In this article, we will break down how crypto loans work, the steps of the loan application process, and how to apply for a loan with Abra Borrow.

What Are Crypto Loans?

A cryptocurrency loan lets a borrower use their existing cryptocurrency holdings — like Bitcoin and Ethereum — as collateral for a loan. Once the collateral is received, the lending platform then issues the loan, typically as a stablecoin, and the collateral crypto is held until full loan repayment.

Adding Collateral

Most crypto lending platforms require that users supply more capital than they intend to borrow an over-collateralized loan. Similar to a traditional loan, users generally have to maintain a certain loan-to-value (LTV) ratio. The issuer clearly states the LTV ratio before the loan origination process begins.

If the value of the collateral asset (i.e., Bitcoin or Ethereum) falls below the LTV threshold, a portion of collateral transfers automatically to the loan issuer — better known as liquidation. Users may want to supply more collateral to maintain the LTV ratio of their loan to avoid having to pay a liquidation penalty. Platforms will normally send a warning to borrowers if they are close to being liquidated.

Paying Back the Loan

In traditional lending, each crypto loan has a specific annual percentage rate (APR) — a percentage of the loan principal amount that the borrower must pay back. Most crypto lending platforms offer low APR, making them highly competitive with traditional lending platforms.

Generating Passive Income for Lending

Crypto lending platforms also have another important segment of users — lenders. These users lend out their crypto to borrowers. Platforms then reward the lenders with interest payments paid in crypto. 

This interest comes from the APR that the borrowers pay. Depending on the asset, lenders may generate well over 10% APY (annual percentage yield). 

Six Reasons to Apply for a Crypto Loan

Although receiving a loan through a bank or lending institution is by far the more commonplace option, a growing number of people are looking towards crypto loans as an alternative. 

Crypto lending platforms provide the following benefits: 

1. No Waiting for Approvals — The entire approval process takes at most 48 hours, whereas traditional banks may take 45 to 60 days for some loan types (i.e., mortgages).
2. No Credit Checks — Crypto lending platforms don’t have to check your credit history when issuing loans. Approval requires only verification that the applicant has enough collateral. 
3. Flexible Loan Terms — Borrowers choose their repayment terms, with no principal payments required throughout the life of the loan. Borrowers pay interest only or pay the entire balance without hidden fees or penalties.
4. APR is as low as 0% — Abra Borrow charges 0% APR for lower LTV thresholds, which means that some borrowers can receive interest-free loans. While banks may offer 0% APR for certain loans (i.e., auto loans), crypto platforms provide a substantial advantage. Since you apply for a loan with a store-of-value crypto you own (i.e., Bitcoin/Ethereum), your collateral may appreciate over time. The collateral is returned upon the end of the loan period.
5. High Borrow Limits — Many crypto lending platforms offer very high borrow limits. For example, Abra Borrow allows each user to borrow up to $500,000 (the exact amount varies depending on location).
6. Maintain Your Portfolio — Last but not least, crypto loans are a convenient way to gain access to additional capital without selling your existing assets. Because taking out crypto loans doesn’t involve capital gains, borrowers can leverage their portfolios to generate cash flow without worrying about crypto tax implications.

Apply for a Crypto Loan in Minutes with Abra Borrow

The first step to applying for a crypto loan with Abra is downloading the Abra app and completing identity verification. Then:

1. Fund your Abra Trade account, and select an amount you would like to use as loan collateral.
2. Use the funds in your trading account as collateral to get your loan. Abra accepts BTC and ETH as collateral.
3. Select which stablecoin you want to borrow: TUSD, USDC, or USDP.
4. Pick out a loan term: 6, 12, 18, or 24 months.
5. Receive your stablecoin loan in your Abra Trade account. You’re free to convert to fiat directly in the app, move funds to your linked bank account, or even withdraw your stablecoin loan to an external wallet.

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