The concept of secured loans is nothing new. If you need cash in a pinch, you can borrow against the equity you have in your home, the value of your car, or even your stocks or similar assets.
But now, certain financial institutions that deal in Bitcoin have expanded the horizons of secured loans by offering the so-called Bitcoin loan. The name of the loan itself is a little misleading. You don’t borrow Bitcoin itself. Instead, you borrow fiat currency using your Bitcoin holdings as collateral.
Here’s a quick look at how Bitcoin loans work.
The Bitcoin Loan Process
Getting a Bitcoin loan is much like getting any other type of loan. You’ll need to start by researching reputable lenders and the loan terms they offer. Once you’ve found a lender you feel confident working with, you can apply for the loan online.
Bitcoin lenders don’t review your credit information. Instead, they simply verify that you own the Bitcoin you claim to. Once a lender has verified ownership of the cryptocurrency, they may offer you a loan worth up to a percentage of your Bitcoin. This is called the loan-to-value (LTV) ratio.
If you agree to the loan terms and are approved, you’ll usually get your funding quickly. As long as you repay the loan on time and as agreed, you’ll get your collateral back once it’s paid off.
Bitcoin Loans: The Pros and Cons
Here’s a brief overview of some of the advantages and disadvantages of Bitcoin loans.
Pros:
- You don’t have to sell your existing Bitcoin to receive funding.
- There are few to no restrictions on how the loan money can be used.
- Because the loan is secured, interest rates are usually low.
- Lenders don’t check your credit.
- Most lenders offer flexible terms.
- Turnaround times are generally faster than those offered by traditional lenders.
Cons:
- If Bitcoin drops significantly in value during your loan term, the lender can demand additional collateral.
- If you miss multiple payments, the lender can take more of your Bitcoin or liquidate your collateral.
- If the lender goes under or is the target of a security breach, you might not get your crypto back.
- There isn’t a lot of oversight of lenders, so some may be less scrupulous than others.
Should you get a Bitcoin loan?
If you need to access cash quickly, a Bitcoin loan might be worth pursuing. That said, it’s important to take the time to weigh the risks and benefits. Consulting a financial advisor would also be wise. But ultimately, you’re the only person who decides if a Bitcoin loan is best for you.
