You are probably familiar with the idea of a loan. When someone is short on cash, they apply for a loan that they promise they will pay back later. More often than not, it would be either a bank or a company that is lending this person some money, which will need to be repaid with interest. That interest is the source of the money that the bank or company makes.

 

We know of this process, but only the one that concerns traditional currencies. With the rise of cryptocurrencies, there is also a noticeable increase in awareness of crypto lending. But how does it work? For that matter, how can someone apply for a crypto loan?

 

How does it work?

 

Put simply, crypto lending is an alternative form of investment. Investors lend cryptocurrencies or fiat money to borrowers and in exchange, they will receive interest payments.

 

Two main parties are participating in this loan process: the lender and the borrower. First, there is the lender, who receives interest in exchange for the loan. Then there is the borrower, who deposits crypto assets as collateral in order to secure the investor’s investment. This way, the lender ensures that should something go awry, that collateral will help compensate them.

 

The process

 

The lending process will vary depending on the platform, but they generally follow the same set-up. First and foremost, the lender will establish an interest rate. When the lending process begins, the lender gives the borrower crypto assets in exchange for bonds that verify the lent crypto. They will receive more bonds as interest and when they want their money back, they can send back the bonds they received via a smart contract. In return for it, they will be given crypto.

 

For borrowers, they first must register on a platform and indicate what their desired sum is. The platform will automatically calculate the amount of crypto that is needed as collateral. The borrower will deposit the collateral onto the platform and apply for the loan. Upon receiving approval, the platform deposits the funds into the borrower’s account.

 

What happens to the cryptocurrency after receiving approval?

 

It is not unusual for someone to be concerned about what will become of their cryptocurrency if they do get approved for a crypto loan. When you think about it, this is a valuable asset that deserves the utmost protection.

 

So long as you are working with a trustworthy lender, you will know that your cryptocurrency will be safe and securely put in storage. With that said, different lenders mean that the storage and security will also be different. Because of this, it would be smart to ask questions to your lender regarding your cryptocurrency’s security.

 

All crypto assets will usually be stored with a depository trust. Moreover, it has the legal and insurance requirements that are mandatory to retain the safety of cryptocurrency in storage. Additionally, any surge in the cryptocurrency’s value throughout the length of your loan will not have any effect on the loan.