Imagine using your Bitcoin or Ether to buy a house without selling your digital assets. Crypto-backed loans make this possible, offering a fresh way to finance property purchases.
Using Crypto to Buy A Physical Property
These loans let you use your cryptocurrency as collateral, meaning you can borrow money to buy a home while keeping your crypto investments intact. Loans based on Crypto do not operate like normal mortgages. These loans do not rely that much on a credit score or long approval procedures. Instead, they are based on the worth of your cryptocurrency.
You deposit your Bitcoin or Ether as a pledge to a lender, who keeps this in some secure account. Should you fail to pay the loan, the lender has the possibility to use your crypto to cover the losses.
With this arrangement, you do not need to sell your digital assets which may increase in value with time. These loans are offered on such platforms as Nexo, Ledn, and Salt Lending.
This process begins by identifying a lender who is willing to accept cryptocurrency used as collateral. There are platforms specifically devoted to crypto loans and few traditional banks are also entering this market.
How Crypto-Backed Real Estate Loans Work
After selecting a lender, you submit an application giving the information about your crypto holdings and financial condition. To hedge against the volatility of crypto prices, the lenders usually take out higher bonded collateral than the loan values up to 150% of the value of the loans.
To give an example, to borrow $100,000 you may have to pledge Bitcoin worth $150 000. Once this is passed, you deposit your crypto into a safe escrow account managed by the lender.
Then, the lender analyzes the property which you plan to purchase. When everything is okay, you reach an agreement on the loan terms, which consist of the interest rates and modes of payments.
There are loans where you pay only the interest monthly and the balance to be paid at the end. The others are in a scheduled repayment as in the case of a normal mortgage. Interest rates also differ on both the lender and the type of loan taken. Therefore, it is advisable to do a comparison.
How Crypto-Backed Loans Offer Tax Benefits And the Risks to Watch
The big benefit of crypto-backed loans is that there is no need to sell your cryptocurrency. This implies that you will not lose out even when your Bitcoin or Ether gains value.
Taxes may also be evoked when one sells crypto, particularly in jurisdictions where taxes levied on capital gains are high. But by using your crypto as collateral, you will not be liable to these taxes, saving you money.
Also, the loans can be easily approved within a relatively shorter time compared to conventional mortgages. Nonetheless, crypto-backed loans are associated with risks.
Cryptocurrencies are characterized by fluctuations in price. When the value of your collateral becomes too small, the lender may give you a margin call to pay in additional crypto to meet the deficit.
They may also sell your assets to get back their money in case you are unable to add more crypto. To prevent that, monitor the value of your crypto and be prepared to take a step in case of a decline in prices. One should also learn the loan conditions, interest rates, and payment terms so that there will be no surprises later.
Risks and Legal Hurdles of Crypto-Backed Loans
Another concern is the legal side of things. Crypto regulations differ from place to place and are still developing. You need to ensure your lender follows local laws, especially rules about preventing money laundering.
The rise of crypto-backed loans shows how digital currencies are changing traditional industries. Today, the options are even broader, but caution is needed.
Scams, like the alleged Phoenix Community Capital exit scam in 2022, highlight the risks of dealing with untrustworthy platforms.
There is also a risk of scams in crypto-backed loans, such as SIM swapping, where malicious actors can take over your phone number to hack your accounts. You can secure your account by opting to use an app-based authentication.
Another level of security is a multi-signature wallet, where transactions require several approvals.
Conclusion
Crypto-backed mortgaging combines the variability of crypto and the steadiness of real estate. But they are to be supported with a keen strategy. By having a proper strategy, you will be able to invest in housing with your cryptocurrency and remain certain about the safety of your investments.
