Cryptocurrencies are special assets that have created a revolutionized financial system. Cryptocurrencies can serve an important function in providing decentralized access to loans.
Crypto loans work in a similar way to regular loans, where you need to provide collateral. However, crypto loans are secured with your crypto holding. Therefore, before you can get a loan, you must hold a considerable amount of crypto assets.
In this guide, you’ll learn more about crypto loans, their advantages, risks, and how to get a crypto loan on the Binance crypto exchange platform.
What is Crypto Loan?
Crypto loans are secured loans where borrowers devote their crypto holdings as collateral in exchange for cryptocurrencies from a lender.
Cryptocurrencies borrowed in these loans are obtained from lenders who deposit their assets so borrowers can easily access them. In return, lenders earn interest fees paid by borrowers.
Platforms that support crypto loans offer them as collateralized lending products. Therefore, before you can get these loans, you must lock up at least 100% of your crypto wallet holding as collateral.
Like regular cash loans, borrowers must pay interest, which serves as an incentive to lenders. Meanwhile, interest rates also differ with platforms.
Many of these platforms offer only short-term loans ranging from 7 days to 180 days on several crypto assets. When you take crypto loans, you must pay back borrowed assets and interest to get all your crypto collaterals back.
The benefits of crypto loans make it a more popular and secure way of accessing low-interest cash seamlessly. It cuts out credit checks and provides same-day cash access to borrowers.
Meanwhile, the whole process is powered by smart contracts, making it more efficient and scalable when compared to traditional cash loans.
Apart from these, it also allows lenders to earn passively without having to interfere or manage the loans. Meanwhile, Crypto Loan on Binance allows borrowers to earn staking yield from their locked collateral. The staking yield is used to pay off some of the accrued interests at the end of the day.
Collateralized crypto loans can be accessed as CeFi or DeFi loans.
- Centralized Finance or CeFi loans are usually accessed as custodial crypto loans via a CEX. This way, the lender has total control over your collateral within the repayment term.
- With Decentralized Finance or DeFi loans, all transactions are locked under a smart contract. Therefore, lenders do not have any access to collateral crypto assets. However, a lender can take action over your account if you fail to meet any requirement or flout any loan agreement.
How do Crypto Loans Works?
Crypto loans occur when a lender deposits their assets so that other people can borrow them. With this, the lender earns interest from the borrower.
The amount of crypto loan you can borrow is typically calculated as the loan to value (LTV) of the crypto asset you’re willing to deposit as collateral. For instance, if the LTV rate of borrowing BUSD with USDT collateral on Binance is 50% and you want to collect a $5,000 BUSD loan, you must deposit $10,000 USDT as collateral.
The LTV ratio on crypto exchanges that offer crypto loans differs. It is usually 65% on Binance and can go as high as 90% with YouHodler.com.
One of the most common disadvantages of crypto loans is the risk of liquidation. When the value of your collateral asset falls slightly below the original value, you must add funds so that it will meet up with the LTV value of your loan.
However, when the value falls below the agreed terms, your collateral will be liquidated and sold off to repay the lender.
How to Get Crypto Loan on Binance?
Binance is a popular destination for all forms of DeFi opportunities globally. Basically, the platform allows users to buy and sell cryptocurrencies. They also have access to earn with staking, saving, lending, and borrowing.
Crypto Loan is one of Binance’s amazing DeFi products. The platform provides access to more than 80 loanable assets and more than 75 collateral assets.
Binance offers a moderately high LTV ratio with an extremely low-interest rate of 0.0013% – 0.0083% daily, about 0.4% to 3% per annum. Meanwhile, you can also earn passively when you lock your collateral asset.
To borrow an asset on Binance, fund your wallet with the preferred collateral asset. Then navigate to Crypto Loan and input the amount of token you want to lock as collateral.
The corresponding amount of loanable assets will be calculated. Select the loan duration and confirm the transaction to collect the loan.
Here’s how to get a crypto loan on Binance:
- Log in to your Binance account
- Fund your account with collateral asset
- Borrow the asset in Crypto Loan
1. Log in to your Binance account
Go to Binance exchange at Binance.com on your web browser. Click on LOG IN from the top right corner of the homepage.
Complete CAPTCHA and 2FA verifications to gain access to your account.
If you’re a new user, simply tap REGISTER to register a new Binance account with your email address or phone number.
On the sign-up page, input your email address and choose a preferred password. Verify your email address with the verification code sent to your inbox.
Once you’re done with the registration, complete KYC verification by submitting a clear copy of any government-issued identity document in your ACCOUNT SETTINGS.
2. Fund your account with collateral asset
As mentioned earlier, you must have enough collateral before you can get a crypto loan on Binance.
Fortunately, there are more than 80 coins that you can choose as the collateral asset.
To fund your wallet with the collateral asset, click on BUY CRYPTO from the top right corner of your home screen.
Select the preferred payment method to continue to the purchase page.
On the purchase page, choose the type of asset you want to buy as collateral, input the amount, and click on BUY.
Remember, you can only borrow 65% of the value of your collateral.
On the next page, input your payment details and confirm your purchase by completing 2FA verifications.
Once your transaction is complete, your wallet will be funded with the collateral asset.
3. Borrow the preferred asset in Crypto Loan
After funding your wallet, click on FINANCE > CRYPTO LOANS from the top navigation bar to secure an instant loan.
On the loan page, select the asset you want to borrow in the first field.
In the second field, select your collateral asset and input the amount of collateral asset you have in your wallet.
The amount of loan you can collect will be automatically calculated with the LTV value.
Select the loan term between 7 days, 14 days, 30 days, 90 days, or 180 days.
Once you’re done, review important details like the liquidation price, hourly and daily interest rate, and repayment amount.
Finally, tap START BORROWING NOW.
NOTE: Your interest rate depends on the loan term and collateral asset. You can go through the FAQ section, User manual, or tutorial if you need further help.
Like every other form of trading, crypto loans can be risky. It takes a lot of planning and diligence to take and repay a crypto loan without asset liquidation.
However, when done properly, crypto loans are an excellent alternative to traditional cash loans. It provides immeasurable value to lenders and borrowers. Apart from this, it is a more automated, decentralized, and effective way of borrowing assets with blockchain technology.
Meanwhile, it is important to understand the important terms and conditions, including LTV ratio, liquidation level, and other agreements, before getting a loan.