The concept of money lending is as old as time, but crypto loans did not exist until a few years ago. As the digital asset industry has grown and expanded over the last decade, so has crypto lending, and as time goes on, different crypto loan apps emerge with unique services and mouth-watering products.
It is worth mentioning that the crypto lending sector did not get massive recognition until the bull run of 2021. This phase ushered in a new era for crypto lenders and loan apps, with borrowers and lenders finally finding platforms to interact seamlessly. While the sector has grown exponentially, there have also been some institutional failures and challenges; however, the pros are believed to outweigh the cons.
How Do Crypto Loan Apps Work
Simply put, crypto loan apps allow the lending and borrowing of cryptocurrencies between market participants and traders. These applications enable users to borrow fiat or cryptocurrencies using their digital asset holdings as collateral.
Crypto loan apps also ensure borrowers pay back their loans with interest after a specified period and that they regain access to their collateral as and when due.
Although crypto loan apps are more advantageous than their traditional counterparts because they let users maintain their privacy – unlike the demand for credit history in traditional finance (TradFi) – the volatility of cryptocurrencies increases the risks of using them, especially during market corrections. Regardless, crypto lending platforms have implemented measures like over-collateralization to ensure these risks are appropriately handled.
Factors to Consider When Choosing a Crypto Loan App
The first thing to consider when choosing a crypto loan app is whether you want to interact with an intermediary or a smart contract. Choosing the former would lead you to a centralized crypto loan app while deciding on the latter would lead you to a decentralized platform.
Centralized crypto loan apps offer more reliability because they often follow regulatory guidelines and implement Know Your Customer (KYC) or identity verification procedures. They have structured terms and support services, making users feel more secure in lending processes.
On the other hand, decentralized crypto loan apps allow users to interact with smart contracts. Smart contracts are digital programs that automatically execute when predetermined terms and conditions are met. While decentralized crypto loan apps, also classified under decentralized applications (dApps), offer more privacy, they come with risks like smart contract bugs.
Besides deciding between centralized and decentralized crypto loan apps, other factors to be considered when choosing lending platforms include:
- Reputation: In the crypto industry, the reputation of projects and brands matters a lot. It is important to examine third-party reviews and testimonials to ascertain the reliability and trustworthiness of any crypto loan app. Another thing to consider is recommendations from crypto OGs and other traders – not promotions or advertisements.
- Cryptocurrencies Supported: A crypto loan app has to support a digital asset before it can be borrowed or lent on that platform. Bear in mind that some apps support a wide range of cryptocurrencies, while others have limited options, namely, Bitcoin (BTC), Ethereum, and stablecoins.
- Loan-to-Value (LTV) Ratio: The LTV ratio compares a collateral’s value to the loan’s size. This is used to determine the financial risk of the transaction. Platforms with higher LTV ratios allow users to take out more money compared to their collateral, although such arrangements often come with higher interest rates.
- Security: Security is a critical factor when choosing a crypto loan app. Platforms that offer robust security measures and extra layers of protection are often better than those that do not.
- Annual Percentage Rate (APR): This refers to the annual cost of taking out a loan. Crypto loan apps with higher APRs charge more fees (plus interest) than those with lower rates and may require that you repay loans on time, to avoid liquidation.
- Customer Support: Strong customer service is an essential factor to consider when choosing a crypto loan app. This is due to how challenging or complex crypto loans can get. However, as stated earlier, most decentralized crypto loan platforms do not offer customer support; centralized apps may be the best option if one needs this service.
Best Crypto Loan Apps
There are many crypto loan apps in both the decentralized and centralized finance industries; however, the best include:
- Aave: Aave is the leading decentralized crypto loan app. The platform is an open-source, non-custodial liquidity protocol that allows users to borrow and lend assets with varying interest rates.
- Binance: Binance is the world’s largest crypto exchange, and as expected, the platform offers crypto lending services. Binance supports various assets, and its interest rates are calculated hourly. As a centralized crypto loan app, Binance offers many benefits, including customer support and security.
- Nexo: Nexo is another commendable crypto lending and borrowing platform. The entity supports at least 60 cryptocurrencies and offers a maximum loan of $2 million daily.
Final Words
Crypto loan apps enable users to handle financial challenges without selling their crypto assets. However, they can also be the reason borrowers get liquidated, especially when the collateral value no longer matches the required LTV ratio. This is to say that these applications come with their pros and cons, and users are advised to do their research before dabbling into the crypto lending space.