Table of Contents Hide
- The Benefits of Borrowing Crypto
- The Cons of Borrowing Crypto
- Should You Borrow Crypto?
Picture this: You’re in a financial pickle. Maybe you were stretching every post-pandemic penny you could get your hands on before you got hit with that sudden expense. Maybe you started a new job but you’re feeling the financial crunch during that right-before-I-get-paid waiting period.
But regardless of how it happened, you need money. And you need it now.
Before the internet, people had to go to the bank or hit up friends and family for cash. But thanks to the explosion of cryptocurrency, you now have another option. You can borrow crypto.
We’re about to break down the pros and cons of borrowing cryptocurrency. All you have to do is keep reading.
The Benefits of Borrowing Crypto
We all know what happens when you’re dealing with a conventional lender. You have to dress up, tell the bank why you need the money, and hope for the best while you wait for the underwriting process to do its thing.
By our count, opting to go the crypto route comes with at least three major benefits.
1. Your Credit Score Doesn’t Matter
When you go to the bank and apply for a loan, your lender is going to be looking at factors like your income, your payment history, your debt situation and, your credit score.
If you happen to have a perfect FICO score, this might not bother you. But if you’re caught in a bind and you need a loan, weak credit can effectively block you from an important source of funding.
With crypto lenders, details like your credit utilization ratio aren’t a factor in whether or not you’re approved. And when you need that cash injection yesterday, the no-credit nature of crypto loans can be very attractive.
2. You’re Not Limited By Your Geographic Area
While the creators of the internet probably didn’t have “Let people lend and borrow crypto around the world” written on their manifestos, this is nonetheless a pretty major benefit.
Back in the day, you would have had to find banks and credit unions in your neighborhood in order to apply for a loan. If you had a car, maybe you could have extended your search a little further.
With crypto, however, you don’t have to settle for the first loan that comes your way. You can sign up for several lending platforms or you can borrow coins from crypto holders around the world.
Put another way, crypto loans expand your borrowing horizons.
3. You Can Get the Money Faster and Often on Better Terms
Payday loans are notorious for their sky-high interest rates. And if you take out a personal loan, it’s not unusual to have a pretty rigid repayment schedule.
This isn’t a terrible outcome when you have a regular source of income. But it can put a real strain on your finances when you’re still getting caught up on bills.
Crypto lenders may charge fees, but those will often shake out to less than the price of interest.
In addition, simply because of the more anonymous nature of crypto, you can skip the underwriting process and vetting that goes on at the bank in favor of getting your money as soon as possible. If you’re in a financial emergency, that’s another point in crypto’s favor.
The Cons of Borrowing Crypto
You may have looked at that list of crypto loan benefits we’ve just mentioned and asked yourself, “So what’s the catch?”. Although borrowing crypto has its perks, here are some of the downsides we’ve noticed.
1. Cryptocurrency Can Be Volatile
If there’s one thing about cryptocurrency that everyone can agree on, it’s that prices tend to go up and down with all the subtlety of a volleyball game.
This could work in your favor if the price drops. But if your repayment period comes up during an upswing, the spiking price of crypto could put a serious dent in your wallet.
To a certain extent, a lot of success in personal finance comes down to certainty. And when your $50 loan could cost you $20 today and $80 next week, it can be hard to budget unless you’re making repayments in crypto.
Read back on previous Aave price points or check out historical records to get a sense of how prices have looked with your preferred crypto of choice. But volatility is still something you need to be aware of when you’re looking at a crypto loan.
2. Coins Can Be Vulnerable to Theft
Before cryptocurrency became mainstream, bitcoin was often in the headlines in part because of the major heists and scams that hackers were routinely pulling off. In 2014, for instance, Mt. Gox disappeared as a result of theft.
And on a practical note, if you have the misfortune of losing your wallet or having your keys stolen, the coins that you’ve borrowed or intended to pay back your loan with could be lost forever and you could quickly find yourself in a terrible situation.
In real life, if you deposit money at your bank and the branch gets robbed a few hours later, there’s no doubt that you’ll be compensated if your money is stolen.
In the crypto world, however, no such resources exist.
3. Lending Scams Are a Thing
When you’re looking for funds, it’s easy to grab onto anything that seems like it could answer your financial problems.
And while crypto has a lot of positives going for it in the sense that there are no regulations, you don’t need a bank account, and you can access your wallet from anywhere.
But those strengths also mean that anyone can put up a website and say they’ll loan you all the bitcoin or Dogecoin you need and you might not be able to verify it.
When you’re dealing with crypto transactions as either a lender or a borrower, you have to be careful. You’ll need to do your due diligence about the platform you’re using. If you’re not sure about the company’s security protocols or you feel uneasy about the site you’re looking at, it’s better to be safe than sorry.
Should You Borrow Crypto?
When your back’s against the wall and you’re not sure where to go for funding, cryptocurrency loans are a viable option. And if you’re careful and you make a point of researching the platforms you’re looking into when you borrow crypto, you just might be able to land yourself a surprisingly low-interest loan.
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