How Do Crypto Loans Work?
Crypto loans work similarly to the traditional loans: borrower receives money and has to place an asset as collateral. In this case, the collaterals are crypto assets.
Terms agreed between lender and borrower
The funds are released after a borrower agrees on the terms and conditions. Borrowers had to make regular interest payments. Moreover, the interest rate charged could be fixed or floating and can vary based on certain factors like market situations, quality of the collateral, the tenure of the loan and more.
Since cryptos are volatile in nature (at least for now), it may happen that value of collateral drops beyond a certain level. To protect borrowers in case of a sharp drop in the value of the collateral there is the margin call possibility: borrowers can call their loan back.
Borrowers usually had to go through several processes to get a loan like documentation, verification, and authentication requests: completing such processes often take weeks and even if a borrower gets a loan, they are charged exorbitant interest along with a number of hidden fees.
On the other hand, crypto backed loans are secured using a smart contract-based system. Such a system operates on blockchain protocol, and can be easily changed as per borrower’s preferences. Blockchain protocol also imposes obligations on the related parties, thus, eliminating the possibility of disputes and makes the whole thing transparent.
Moreover, these smart contracts can be created for days, months or even years. Documentation is also quick: the loan is processed almost instantly once the parties settle on the terms of the crypto-backed loans because crypto-backed loans do not require any paperwork, credit score checks and other unnecessary authentication processes.