Cryptocurrency loans make it easy to leverage your digital currency holdings for cash or vice versa, making decentralized finance (DeFi) options like crypto loans immensely popular—see how much USD value is locked into the DeFi ecosystem here.
The rise in popularity of these loans has led some to wonder whether it is possible to get a crypto loan without collateral. Let’s quickly cover what collateral is, why it’s important for receiving a crypto loan, and if there are any options for getting a loan without collateral.
Want a Crypto Loan? You’ll Need Collateral
When applying for a cryptocurrency loan, the first thing you’ll notice is that the lending platform wants some form of guarantee that you can repay the loan. Imagine that you want to borrow $20,000—to put the lending service at ease and guarantee your ability to handle the loan, you’ll need to deposit funds over the loan value (2X the loan amount in some cases).
The funds you are required to deposit act as your collateral. Collateral is a way for both parties involved in a loan to mitigate and reduce risk.
Collateral gives lenders a cushion in case the loan turns south and heads toward being margin called. Borrowers, on the other hand, only borrow what they can reasonably pay back based on their staked collateral. By requiring a borrower to stake collateral for a crypto loan, loan platforms help ensure a safe financial environment for both parties.
Because cryptocurrency values fluctuate daily, staking a large amount of collateral relative to the loan value is important. For example, a lender may require a maximum LTV (loan to value) ratio of 50%—meaning you’ll need to make a cryptocurrency deposit that is worth twice the amount of the cash loan you are requesting.
Some lenders offer loans with less collateral needed, say, a 70% LTV requirement, for example, but your monthly payments and interest rates will be higher, closer to a traditional bank loan. However, your crypto loan won’t require a credit check whereas a bank loan will.
Overcollateralization is a staple of the crypto loan industry. Because decentralized lending platforms operate on smart contracts, the need for counterparties to transact on a level playing field is high.
That’s why you’re unlikely to find uncollateralized crypto loan options, although there is one option being offered by a trailblazer in the DeFi industry.
First Uncollateralized Crypto Loans Offered, But…
While collateral is required in 99% of cryptocurrency loan scenarios, some platforms are piloting a new type of uncollateralized crypto loan. Aave, previously ETHLend, is offering a product called Flash Loans.
Flash Loans are crypto loans that don’t require collateral of any kind, enabling you to borrow on the spot. The payoff for lenders comes in the form of fees collected—each Flash Loan is subject to a 0.09% fee on the crypto loan total. This fee is then split between the platform and lenders.
These loans, however, are not meant for everyone. They’re designed for developers who have a good understanding of Ethereum, programming, and smart contracts, according to the Aave website. That’s because borrowers must create the smart contract themselves.
Another emerging company is aptly named Zero Collateral. But it requires you to “earn” collateral-free loans by becoming a top-rated borrower. Therefore, you can’t take out an uncollateralized crypto loan off the bat.
As a new product in the crypto loan industry, uncollateralized crypto loans are relatively unproven. But, owing to their low barrier approval for loan applicants, they may quickly prove to be popular.
