Crypto Loans as Payday Loan Alternatives for Bad Credit

Expert Verified

Gregory Allen Nov 25, 2024

Payday loans are short-term borrowing options that provide almost instant financial support to people who need money quickly and can't access traditional forms of financing. The study made by the Pew Charitable Trust shows that about 12 million Americans use them each year. These products are very popular with bad credit borrowers as they require no credit check and can be obtained without collateral.

Still, payday loans often come with very high APRs of over 400% and have short repayment periods between 2 and 4 weeks. This can potentially lead to a cycle of debt, making them high-risk products, especially for people who already face financial problems. As a result, more and more people start looking for reasonable payday loan alternatives.

Crypto loans are one of them. These innovative products are available to borrowers with a low income and less-than-perfect FICO rating. However, these options come with several considerations. Let's find out what crypto loans are, how they work, and whether they can replace regular payday loans for people with bad credit.

Table of Contents

1. What Are Crypto Loans?
2. Types of Crypto Loans
3. Why Are Crypto Loans Good for Bad Credit Borrowers?
4. How Do Bad Credit Crypto Loans Work in Practice?
5. Benefits of Crypto Loans
6. Risks of Crypto Loans
7. How to Choose the Right Crypto Loan
8. Are Crypto Loans the Right Choice for You?
9. Final Thoughts
10. FAQ

What Are Crypto Loans?

A crypto loan is a borrowing option issued by a crypto lending platform in a digital currency, such as Bitcoin or Ethereum. These loans are typically secured, meaning that your crypto assets are used as collateral and serve as a repayment guarantee. However, some unsecured options are also available.

Crypto loans are similar to personal loans, meaning that you can use the money borrowed for any personal needs. However, they have different application procedures and repayment terms.

Types of Crypto Loans

There are two main types of crypto loans: centralized finance loans (CeFi) and decentralized finance loans (DeFi). Here's a closer look at each option.

CeFi Loans

CeFi loans are always collateralized, meaning that a borrower needs to provide their crypto holdings as collateral to receive the loan funds. You can typically get from 50% to 90% of the asset's value.

The pledged amount of crypto needs to be transferred to the platform's digital wallet, so you won't be able to access the funds until you repay the loan in full. Most crypto loans offered in the market are CeFi loans. Some of the most popular platforms providing them are Binance, Coinbase, and CoinLoan.

DeFi Loans

DeFi loans come with gifital contracts called smart contracts. They facilitate transactions and allow borrowers to receive money from other users, eliminating the need for a central authority. Some of the most popular DeFi loan platforms are Aave, Defi Swap, and Crypto.com.

Borrowers can access both collateralized and uncollateralized loans under the DeFi protocols. Collateralized options are technically not entirely secured. A borrower retains control of their asset but a lender can take automatic actions against their account in case of loan default or missed payments.

Uncollateralized loans are available without any security deposit. They are approved by the platform's auditors based on a borrower's previous activity within the blockchain, debt-to-income ratio, lending history, and current capital. Such loans are less common and are usually available for institutional investors only. One of the most popular platforms offering unsecured crypto loan options is Atlendis.

Why Are Crypto Loans Good for Bad Credit Borrowers?

Crypto loans may be great payday loan alternatives due to their low interest rates and flexible repayment terms. While they also provide accessibility and speed, they can cost you as little as 3% to 18% per annum. This is much lower compared to payday loans, as their APRs typically reach three-digit numbers.

While a crypto loan can come with a repayment period of about 7 days to meet your short-term needs, you can also choose to repay it over a longer time in affordable installments. Some crypto loan platforms offer products for up to 180 days, while others provide options for 12 to 60 months.

How Do Bad Credit Crypto Loans Work in Practice?

Crypto loans allow you to borrow a certain amount of cryptocurrencies against your own crypto holdings. This way, you don't need to sell your assets. This may be very beneficial if the market price of your digital currency is on the rise, but you still need money fast to handle unexpected expenses.

The first step you should take is to choose the right platform to deal with. Decide on whether you're going to use a CeFi or a DeFi platform and make sure you understand all the terms. Keep in mind that the lender's reliability is very important when it comes to any crypto transactions. Search for reputable platforms and compare their interest rates, repayment options, funding times, and any extra fees they charge.

To get a crypto loan, you need to own any of the cryptocurrencies that the platform accepts as a pledge. Most well-known services typically work with Bitcoin (BTC), Ethereum (ETH), Tether (USDT), Avalanche (AVAX), Cardano (ADA), Cosmos (ATOM), Polkadot (DOT), Stellar (XLM), and more. Please note that the amount you can borrow will always be lower than the current value of your crypto holdings.

Once you're sure the platform you choose to work with accepts your digital currency, create an account via the service's website or app. This step typically requires you to verify your identity and cryptocurrency.

Next, you need to log into your account and select the appropriate section on the platform's website or in the app. Crypto loans are typically available via the "Finance" section. Then, you need to create a loan order. At this stage, you choose a loan amount, currency, the repayment period, and a loan-to-value (LTV) percentage you're comfortable with. Based on these details, the platform will show how much collateral you need to provide to get a loan and calculate your interest rate.

If you're fine with the terms, you need to submit your loan request. Crypto lenders usually approve applications instantly, so you can check its status via sections like "My Borrowings" or "My Orders," depending on the platform. If approved, you need to transfer your collateral to the platform's digital wallet to complete the transaction. Then, you will get the selected cryptocurrency in your digital wallet or borrowing account on the platform.

Finally, you need to pay off your crypto loan in accordance with your repayment schedule. In most cases, you can only make it in the borrowed crypto asset via the same account or digital wallet used to receive the loan amount.

Benefits of Crypto Loans

Crypto loans provide numerous benefits for people with bad credit. Here's what they offer:

• Quick approval. Crypto lenders usually approve applications instantly, so you don't need to wait much for a response.
• Fast funding. Crypto loans are quite as quick as payday loans. They typically allow you to get cryptocurrency on your borrowing account within 1 business day.
• No credit check. You don't need to undergo any hard inquiries to get approved for a loan. Your ability to provide collateral is the only determining factor.
• Low interest rates. Loans against crypto are much cheaper compared to regular payday loans, resulting in significant savings over the loan life;
• Flexible repayment options. You can choose the repayment period that corresponds to your current financial goal and situation.
• No need to sell your crypto assets. Crypto loans are not about true disposal of your holdings, so there are no tax implications associated with them. Plus, you can still benefit from their increased value over time if their price is on the rise.

Risks of Crypto Loans

While crypto payday loans have several benefits over regular ones, they still come with several considerations. Here's what you need to be aware of before entering any deals:

• Collateral is required. Most loans against crypto require you to put up your crypto assets as a repayment guarantee. This means that you need to own cryptocurrency to get a loan and can lose it if you aren't able to repay the money on time.
• No access to your crypto. When you provide your crypto assets as collateral, you can't use them for tradition or making any transactions until your loan is fully repaid.
• The lack of FDIC protection. Cryptocurrencies are not protected by The Federal Deposit Insurance Corp. (FDIC) and come with a lack of regulation across the US. This means that you may lose your crypto if your lender folds.
• Potential risks of value decrease. If the price of your crypto assets drops below a certain threshold, it will result in margin calls – a situation where you will be asked to provide extra crypto as collateral.
• Security. Although blockchain technologies are considered quite safe, they can still be subject to hacker attacks. Additionally, there's no compensation guaranteed if you lose your assets due to cybercrime activity.

Thus, traditional payday loans may better suit borrowers who don't have crypto holdings or are new to the world of digital currencies and blockchain technologies.

At ASAP Finance, you can access small payday loans of up to $1,000 without providing any repayment guarantee. The entire process can be completed via the website in just a few clicks, so you can request much-needed financing even if you're not very tech-savvy. We also work under federal law and use modern security protocols to ensure your data privacy. Thanks to our transparent loan terms, you will always know what you're going into.

How to Choose the Right Crypto Loan

Before you take out a crypto loan, it's important to choose the right lender and know about the red flags that can indicate potential problems and dangers. Here are a few tips to help you borrow crypto safely.

Tips on Finding a Reliable Crypto Loan Provider

Take a look at the major factors you need to pay attention to when choosing a crypto loan lender:

• Reputation. Reputable loan providers ensure you are less likely to face any problems during the entire borrowing process. Read customer reviews first to ensure you're dealing with a reliable platform.
• Security. Make sure the lender outlines how it will keep your crypto and uses all the needed protective measures to secure your assets and information. It's also a good idea to check the lender's history, practices, audits, and reports.
• Loan terms. Check out the lender's interest rates, repayment periods, extra fees, collateral requirements, LTV percentages, and any other details that can affect your loan.
• Customer support. This option is especially true for people who are new to crypto borrowing and may need assistance during the loan process. Good customer support also ensures any of your potential problems will be fixed in no time.
• Types of crypto accepted. Make sure the platform supports the digital currency you own and allows you to use it as collateral.

Red Flags to Pay Attention to

Besides some common features, learn more about red flags in crypto lending platforms:

• No registration. Each platform that offers crypto loans must be registered as a money service business (MSB) with the Financial Crimes Enforcement Network (FinCEN) and state regulators. Visit fincen.gov/msbregistrant-search or csbs.org/nationwide-multistate-licensing-system first to check registrations.
• Guaranteed returns. When it comes to crypto assets, there are no risk-free strategies or guaranteed payouts. Also, keep in mind that committing more money doesn't guarantee higher returns as long as you don't increase your risk level.
• No ability to withdraw money. A reliable crypto platform should not set rules regarding your account balance or status in order to allow you to get your own money back. You should also avoid paying any undisclosed charges to withdraw your assets.
• Claims about federal insurance. Avoid platforms that state that their users' assets are federally insured. FDIC and National Credit Union Administration (NCUA) only protect bank or credit union customers.
• There are no contact details or physical address. It is much easier for criminals to simply disappear after scam disclosure when they only have a website and an email address. Make sure the platform has a physical address, a contact phone number, and good customer support. Check out whether the address actually exists and the company is actually registered there.

Best Crypto Loan Platforms as of 2024

Looking for a trusted crypto loan platform? Here are several services you can turn to for a smooth experience.