Do Crypto Loans Incur Interest?

Do Crypto Loans Incur Interest?

2021 has been a landmark year for cryptocurrency so far. In January, the combined market value of all crypto assets across the world exceeded $1 trillion for the first time, becoming equivalent to the fifth most circulated currency in existence.

But whereas any value from holding cryptocurrency has generally sprung from buying low, holding on to the stock as its worth appreciates and then selling it on for a profit, the advent of lending in the sector has introduced the concept of crypto interest. Although crypto loans share much in common with tradition loans, they do differ in significant other ways – which results in better outcomes for everyone.

Crypto loans vs conventional loans

Until now, someone who wished to borrow from a bank or other financial institution would have to submit a loan application, including proof of their good credit history and something to act as collateral for the loan amount. They would then pay an agreed rate of interest on the loan over its duration, meaning the amount they eventually pay back is (sometimes significantly) higher than that which they initially borrowed.

Crypto loans work in much the same way – except that instead of relying on banks to authorise the transaction and supervise the funds, they work via crypto lending platforms. Here, the individual lender is connected directly with the borrower, meaning any profit gained from the interest goes directly to them – with the platform taking a nominal percentage for their services.

Lucrative for lenders

By cutting out the middlemen of banks, the non-custodial set-up of certain crypto loan platforms means that only the borrower and the lender have access to the assets in question. This means that rather than taking the tiny percentages of below 1% that are being offered by most high street banks on their current and savings accounts, lenders can take the lion’s share of the profits.

What’s more, those profits themselves are far higher than they are in the non-crypto world. The unique arrangement of the crypto loan system means that interest rates can be many times higher than with fiat currencies, including earnings of up to 15%. That’s considerably more than any comparable market on the product these days, which is why crypto lending is becoming increasingly popular as a method of passive income for investors.

Borrowers in the driving seat

It’s not just lenders who benefit from the arrangement, either. Borrowers can take advantage of the low collateral ratios – and wide collateral options – available at providers like to access finance that they wouldn’t normally be able to. Instead of having to jump through the hoops of a credit check and comply with the terms and conditions stipulated by a bank, they can borrow on their own terms.

Meanwhile, the fact that all crypto loan transactions are handled digitally means that it can be processed at a far faster rate than conventional lending allows. Similarly, the sophisticated Blockchain technology employed in the process safeguards the transactions from malicious cyber criminals and makes theft or fraud all but impossible.

Crypto loans do carry interest – but unlike in conventional finance, that’s actually a good thing. Borrowers can access a greater range of transparent options more easily and quickly, while lenders can benefit from a passive stream of income that isn’t siphoned off by institutions.

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