Lenders offer fiat money against crypto assets as collateral. It means in exchange for Ether, Bitcoin or Litecoin as collateral you can borrow USD currency. Crypto-backed loans are an efficient and cost-effective way of managing your cryptocurrency portfolio when you need money to fund other projects.
What can you use crypto-backed loans for?
Crypto loans can be applied in several ways.
- Go on vacation or pay off travel expenses.
- Invest in real estate.
- Fund a new business project.
- Diversify your portfolio.
- Refinance debt.
- Investors can use a crypto asset loan and pay less interest because the transaction tax gets eliminated because you are borrowing and not selling an asset.
Crypto-backed loans concerning taxation
Well-Defined guidance is unavailable for crypto-backed loans but you can compare it with traditional lending terms regarding taxation.
- For tax liability, virtual currencies need to be considered as property. Property used against collateral is not considered saleable. Therefore, borrowing against crypto assets will not activate capital gain taxes.
- The loan purpose will define whether the interest to be paid is tax-deductible or not. For example, loans for the purchase of property or commercial purposes are tax-deductible. Loans for personal use are not considered tax-deductible.
The crypto-backed loan borrowing process
The lenders and borrowers reveal their needs and join together in a transaction, where borrower deposits crypto assets and lender transfers fiat money. A loan of 60% to 70% of existing market value gets approved and the interest rate is a factor of mutual agreement. On completion of duration, the borrower will repay the principal loan amount including interest and the lender will return the total crypto-collateral.
What are the benefits of a crypto-backed loan?
From lenders perspective:
- As there is an assurance of total fund repayments including interest, the risks get reduced. As the system is automated and exchange occurs directly to a bank account makes it easy to monitor funds usage.
- Even foreign borrowers can gain access to crypto-backed loans as it is decentralized.
- The minimum loan amounts up to $100 and the maximum amount is determined on the borrower’s budget and collateral they can offer.
- The infrastructure is robust and ensures total fund security.
- Any legal entity or individual can lend without any license.
From borrower’s viewpoint:
- No mandatory need like credit history checks and payment capacity proof.
- Loans can be withdrawn via bank transfer or bank cards.
- The terms and conditions of lending are flexible. It can easily be optimized for both the lender and the borrower.
- Loan collateral options are several including Litecoin, Bitcoin, Ethereum, etc.
- Borrowers can preserve their crypto assets because there is no need to sell them when fiat currency is needed.
How does the crypto-backed loan process work?
The loan application gets reviewed by the lender and they revert back to the borrowers in a couple of days with a loan offer. Some elements of the offer include –
- Interest rate, generally 8%.
- Origination fee, usually 1% to 2%.
- Annual percentage rate [APR].
- Crypto-collateral essential details for wagering on a loan claim.
Crypto-backed loans are regarded as the future of lending!