Here is a guide to key crypto loan terms and concepts:
A-Z of Crypto Loan Terms
APR (Annual Percentage Rate) / APY (Annual Percentage Yield): The annual cost of borrowing (APR) or the return earned on lending (APY), expressed as a percentage. These rates can be variable and are often higher than traditional finance options.
Borrower: An individual or entity that receives funds by pledging their crypto as collateral.
CeFi (Centralized Finance): Lending platforms operated by a central company (like a bank). They often offer customer service and are subject to some regulation, but involve counterparty risk.
Collateral: The cryptocurrency assets (e.g., Bitcoin, Ethereum) that a borrower locks up to secure a loan. This is usually over-collateralized to mitigate market volatility risks.
Counterparty Risk: The risk that the other party in the transaction (e.g., the lending platform) may default on its obligations or become insolvent.
DeFi (Decentralized Finance): Lending protocols that operate on a blockchain using smart contracts without a central intermediary. They offer more privacy but come with smart contract and potential governance risks.
Default: The failure by a borrower to repay the loan as agreed, which can lead to the liquidation of their collateral.
Fiat Currency: Government-issued currency like the US Dollar or Euro.
KYC (Know Your Customer): The process of verifying a user's identity, typically required by CeFi platforms to comply with financial regulations.
Lender: An individual or entity that provides cryptocurrency to a platform to earn interest from borrowers.
Liquidation: The forced selling of a borrower's collateral by the platform if the value of the collateral drops too much or the borrower defaults.
LTV (Loan-to-Value) Ratio: The ratio between the borrowed loan amount and the value of the collateral provided. Platforms set a maximum LTV (e.g., 50% to 70%) to manage risk.
Margin Call: A notification to the borrower that their collateral's value is close to the liquidation threshold, requiring them to add more collateral or repay part of the loan to restore the LTV ratio.
Smart Contract: A self-executing program on the blockchain that automatically manages the terms, collateral, and repayment of a DeFi loan.
Stablecoin: A cryptocurrency pegged to a stable asset, like the US Dollar (e.g., USDC, USDT), used in lending to reduce volatility risk.
Volatility: The rapid and significant price swings common in the crypto market, which is a primary risk in crypto lending as it can trigger liquidations.
How to Get a Crypto Loan (Step-by-Step)
Choose a Platform: Research and select a reputable CeFi or DeFi platform by comparing interest rates, fees, LTV ratios, and security measures.
Select Collateral: Decide which supported cryptocurrency you will use as collateral.
Determine Loan Amount: Decide how much you need to borrow based on the platform's LTV limits. You can typically borrow in fiat or stablecoins.
Connect Wallet/Verify Identity: For CeFi, complete KYC verification. For DeFi, simply connect your compatible crypto wallet.
Deposit Collateral & Receive Funds: Once you agree to the loan terms, transfer your collateral to the platform. The funds are usually disbursed quickly.
Manage and Repay: Make regular payments of principal plus interest. Monitor your loan's health (LTV ratio) to avoid liquidation during market downturns.
Reclaim Collateral: After full repayment, your locked collateral is returned to you.
