Home / Markets / Cryptocurrency /  Making sense of loans against cryptocurrencies

What if someone told you that you could take a loan at a dirt-cheap rate of 4.5% a year without having to sign any document, pay overhead fees, pledge your home, car, or a cash deposit or even provide your Cibil score?

All this with just a few taps on your phone and some cryptocurrency in your (digital) pocket.

A crop of new-age ‘crypto banks’ is offering such loans to people who own cryptocurrencies like bitcoin, ethereum and tether, among others. Crypto owners can pledge their digital tokens and avail a loan in the form of cash or a stablecoin, which in turn can be sold on an exchange to get money in the Indian rupee in their bank account.

The crypto industry calls them secured loans.

Vauld, Crypto.com and BlockFi are some of the platforms that allow Indian borrowers to avail credit against their crypto holdings. UK-based Cashaa is expected to roll out its lending against crypto activity in collaboration with co-operative banks in the last quarter of the current fiscal.

One of a kind loans

While there is no upper limit to the amount of credit one can borrow through this route, these loans are given at a loan-to-value (LTV) ratio of 50%-65% of the pledged cryptocurrency’s price.

Typically, loans against cryptos do not have a fixed loan term and they don’t come with a defined repayment schedule, such as an EMI, either. Essentially, a borrower can repay anytime and in any number of undefined installments as she wants.

The annual interest rate on crypto loans range between a wide spectrum of 4% to 15%, depending on the type of token that is collaterised. For instance, Vauld offers an annual rate of 7.5% on bitcoin and ethereum, whereas stablecoin USDT or Tether is taken at a rate of 13%. There are zero overhead charges involved, as opposed to a personal loan that come laden with processing fee and foreclosure charges of 2%-3%.

Darshan Bathija, CEO, Vauld, which has recorded 60x growth in its lending segment in the last 12 months, believes loans against cryptos score over personal loans on many fronts than just offering cheaper interest rates. “There is no capital gains liability, they provide affordable leverage for trading and you get to retain your investment while getting the money worth the token’s value out."

Should you take it?

The biggest risk to crypto-based products is the high volatility intrinsic to digital tokens. A sudden crash in crypto prices can change the dynamics of your loan terms.

Kumar Gaurav, founder and CEO, Cashaa, explained, “During a market downturn, we inform the user when their collateral amount goes below a certain threshold. We prompt the user to deposit more crypto to maintain the LTV ratio, failing which we sell a portion of her crypto to adjust the LTV."

A major downturn to these loans is that they are constantly subjected to margin calls or forced liquidation. “We’ve seen in the last one year how volatile crypto markets are. In the case of a sudden crash, you may lose a portion of your holding and attract capital gains or losses," said Amit Suri, a Delhi-based financial planner.

Industry stakeholders pointed borrowers usually take these loans when they want liquidity but don’t want to sell their holdings. In this case, financial planners advise that people should not pledge the entire holding in their investment portfolio so that they can use it to increase the value of the collateral, if the need arises. Suri advised against borrowing against cryptos for discretionary spends.

How crypto loans compare to other options

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