If you’ve ever taken out a personal loan, you may have found that you get a lower interest rate with a secured loan—meaning a loan where you’ve put up some collateral.
A typical example is a home equity line of credit (HELOC), a credit line you borrow against the equity you have in your home. HELOCs come with lower interest rates than many types of loans, but that’s because the lender can take your house if you don’t pay.
Still, if you’re confident in your ability to repay it, a secured loan can be a great way to get the cash you need while saving money on interest rates. And one type of secured loan that’s been steadily gaining popularity is the .
What’s a Bitcoin loan?
Simply put, a Bitcoin loan is an installment loan secured by your Bitcoin holdings. If approved for one, your lender will give you a cash loan—usually up to a certain percentage of your Bitcoin (or at least the Bitcoin you put up as collateral).
If you repay the loan in full and on time, you get all of your Bitcoin back. If you miss too many payments or default, the lender can take your Bitcoin. In some cases, they may also be able to take additional Bitcoin from your account.
Bitcoin Loans: The Advantages
Why go through all the trouble of taking out a somewhat unusual type of secured loan when there are other things you can do to get cash quickly? Bitcoin loans have many benefits, some of which you don’t get with other loans.
Low interest rates
Secured loans often boast lower interest rates, giving you more financial freedom compared to unsecured options. However, Bitcoin loans have some of the lowest interest rates of all. There’s a variation between providers, but interest rates are .
You can “cash out” your Bitcoin without actually selling
This is one of the biggest draws of Bitcoin loans. Bitcoin and other cryptocurrencies are known for being volatile. Still, some investors think they’re poised for long-term growth as more people become interested in investing.
If Bitcoin values are high, many investors want to be able to cash out on that value—but they also want to hang on in case Bitcoin becomes even more valuable. Bitcoin loans let you do both. You get access to a portion of your Bitcoin’s value in cash, and as long as you pay it back, the Bitcoin is still yours to hold.
There (usually) aren’t restrictions on what you use it for
Often, if you get a loan from a bank or credit union, it must be for an approved purpose. This process is sometimes the case for personal loans, too. If you want a loan you don’t need to explain, a Bitcoin loan might be a good choice.
Approval and funding are usually fast
If you need cash quickly, you don’t want to wait days or weeks for a lender to consider your application (and then wait an additional few days for the funds to hit your account). Many companies offering Bitcoin and other cryptocurrency loans can review your application, approve you, and fund your account within 24 hours.
Lenders don’t check your credit
If you don’t have stellar credit, you already know that it can be a significant barrier to getting favorable loan terms—or even getting approved for a loan at all. So, if your credit isn’t great, but you have significant Bitcoin holdings, you might have better luck with a Bitcoin loan provider.
That said, the fact that crypto lenders don’t do a credit check doesn’t mean they blindly hand out loans. Lenders need to verify your Bitcoin holdings beforehand, and most will also need to verify your identity.
Bitcoin Loans: The Disadvantages
Every type of loan has its drawbacks. Before making a decision, you should also know about the potential downsides of Bitcoin loans.
You might need to put down extra collateral
Anyone even vaguely familiar with Bitcoin knows that its value fluctuates dramatically. When a lender gives you a cash loan, the loan amount is a portion of your collateral. So, what happens if Bitcoin’s value drops so far that the loan is worth more than the collateral?
In this instance, you must put up additional Bitcoin as collateral. This tactic complicates things a bit. Keeping a Bitcoin reserve is always wise if the lender asks for more collateral.
If you don’t pay, the lender gets your Bitcoin
This disadvantage isn’t unique to crypto loans: with any secured loan, the lender gets the collateral if you can’t pay. Remember that the cash loan the lender gives you is less than the total value of the Bitcoin you put up as collateral. If the lender keeps your Bitcoin, you face a more significant loss.
If the lender fails, you could lose your Bitcoin
Before you take out a Bitcoin loan, it’s essential to research providers and choose a reputable one. As you may have guessed, crypto lenders don’t have the same regulatory oversight as so-called “traditional” lenders. If a lender goes out of business and disappears, you may be unable to recover your Bitcoin.
You (sometimes) can’t access your Bitcoin
This isn’t universally true across all Bitcoin loan providers. However, in most cases, it’s true: to get the cash, you must give the lender control of your Bitcoin until you pay off the loan.
Is a Bitcoin loan the right choice for you?
The only way to decide whether a Bitcoin loan is right for you is to carefully weigh the advantages and disadvantages—ideally with the help of a financial advisor. Of course, remember that this type of loan likely isn’t your only option. Personal loans from banks or credit unions, credit cards with low introductory interest rates, and home equity lines of credit are other possibilities to get funds upfront without owing a fortune in interest.
A Bitcoin loan can be a viable and advantageous option for individuals seeking quick access to cash while leveraging their Bitcoin holdings as collateral. However, before committing to Bitcoin loans, it is crucial to do research.
Take into consideration the advantages and disadvantages listed in this article to help you figure out if taking out a Bitcoin loan is the right move for you.