Would you believe it if you were told that you could now borrow with interest rates as low as 5 to 15% without needing any documentation, collateral, or additional fee other than the network fee? It might be shocking, but zero-collateral DeFi lending is not a distant dream anymore.
Various platforms are now offering zero-collateral crypto loans. The majority of them are offering these benefits only to institutional investors. However, Teller offers no collateral benefits to everyone globally with their Ether Money Market.
With the immense popularity of crypto assets in the last few years, crypto investors are constantly searching for new methods to earn passive income from their crypto holdings. Many experts believe that crypto lending and borrowing platforms if given the right impetus, have the potential to bring the entire debt market to the blockchain. This becomes a boon for those people who wish to borrow crypto assets to open a new trading position and earn profits on their positions.
However, not every platform out there has the best to offer. Over 10,000 crypto assets are floating in the market, with hundreds of crypto borrowing and lending platforms springing up daily. Certain factors must be considered before choosing which platform to use to borrow and lend crypto. If you are wondering what these factors are, do not worry! We have got you covered. But before we start discussing the factors to remember while choosing a crypto lending and borrowing platform, let us first understand what crypto lending is in detail and the different types of crypto loans available in the market.
What are Crypto Lending and Crypto Borrowing?
For lenders, crypto lending is where investors can earn interest on their crypto assets without selling their position. For borrowers, Crypto borrowing is a new method of financing where investors can borrow crypto loans by offering their cryptocurrencies as collateral. This is collateralized crypto lending; there is another method where borrowers can get crypto loans without putting their cryptos as collateral. This is called zero collateral crypto lending.
Crypto investors who wish to HODL their crypto assets for a long time can earn interest while they lend their assets to the borrowers. Crypto loans can be availed on centralized and decentralized crypto platforms.
Difference Between Collateralized and Uncollateralized Crypto Loans
Collateralized Crypto loans
A collateralized crypto loan is a secured way of borrowing where crypto holdings are put as collateral by the borrower in exchange for the loans. As long as the borrower meets the repayment conditions, he will remain eligible to receive his crypto back. This collateral serves as a medium of security where the lender can repossess the holding in case of a payment default.
The loan amount approved is usually a percentage of the crypto assets put as collateral. In case the value of the crypto holdings drops while the loan is open, the borrower is required to provide extra collateral. In the case of crypto loans, the interest rates are usually less than traditional finance methods.
Uncollateralized Crypto Loans
Zero collateral or uncollateralized crypto loans are among the most attractive types for borrowers. Borrowers can get crypto loans from lenders without any collateral. There is no need to create an account and fulfill KYC requirements while using a decentralized finance platform for zero collateral crypto loans. All they have to do is to connect their wallets and start depositing their cryptos. In the case of zero-collateral crypto loans, the platform establishes trust in three ways:
- Credit score checks by Centralized institutions
- Approval basis on-chain reputation
- Premium membership
DeFi loans without collaterals drive on the five Cs of credit: character, condition, capacity, collateral, and capital. All these factors make the borrowing and lending processes easier, simpler, and faster. Teller is one of the premium companies offering uncollateralized crypto loans.
While different platforms stand out differently, the question always arises of how to choose the best crypto lending and borrowing platform. Or what are the factors to remember while choosing a crypto lending platform? Below we have listed the top five factors you must keep in mind when choosing a platform to borrow or lend your crypto assets.
- Interest Rates Provided
- Community Reviews
- Security & Flexibility
Interest Rates and Duration
Interest rates are one of the most pressing factors when choosing a crypto lending and borrowing platform. Compare multiple platforms and choose the one that meets your requirements. Lenders often require a greater lending rate to generate passive income from their crypto holdings. However, if you are a borrower, go for only those interest rates that are feasible enough for you.
There are cases of flash loans that are not collateralized, and the borrower is lent money without any collateral. However, the fees are way too high. Choose to take flash loans only if the combination of tenure, the fee, and the interest rates appear convenient for you. One thing to note is that DeFi loans usually have higher interest rates than CeFi loans.
You can even read about the 5 Best crypto lending platforms with zero collateral.
You must compare the fees charged by the platform with a few others. Since the uncollateralized crypto loan sector is new and very few users know about zero collateral crypto loans, many platforms tend to keep high fees due to the high risks involved. Additionally, as mentioned above, fees on low-tenure zero-collateral flash loans are higher than on loans with larger tenures. The fee also depends upon centralization. Decentralized platforms like Teller are comparably cheaper than centralized crypto lending platforms as the markets and the pools are governed and operated largely by the community members and platform participants.
Reviews are important whether you buy the latest summer collection from Amazon or lend your crypto asset on a decentralized finance application. Read feedback from past users and the experience of previous borrowers to conduct due diligence on the authenticity of the platform and every other information available about it. Reddit, Twitter, forums, Telegram, and Discord are some of the best community-focused channels that provide tremendous information on a platform’s functioning. A platform backed by a strong community indicates its authenticity in a market full of counterfeits.
It's the users that make or break a platform. If the platform provides what it claims, it definitely will have positive reviews. Teller is one of the premium platforms providing one of the best-in-class services for zero collateral lending and borrowing. With multiple markets to invest in and the option to launch your pools, it has become quite popular in the crypto lending space in no less time. It also collaborated with Chainlink to build a proof of concept of an undercollateralized lending platform.
Nothing comes above security, and it should be your prime concern. If you are a lender, this becomes more relevant in the case of an uncollateralized crypto-lending platform. If you are a borrower, it is preferable to borrow on only trusted platforms with a substantial customer base and smart contracts audited by a trusted auditing company. You should research the security protocols followed by the platform and the actions taken by the platform to ensure its security from cyberattacks and hacks.
You should also research whether any scam or hack-related event had happened in the past that challenged the security protocols of the platform. If yes, how did the platform overcome it? All these factors must be considered before choosing a crypto lending and borrowing platform.
Not every platform can be perfect. While it performs the best in a few situations, it might also have its limitations. A few crypto lending and borrowing platforms have geo-restrictions and can be operated only in certain jurisdictions. Check if the crypto lending platform you are trying to use is available for your location.
Another restriction you might come across is the non-flexibility of modifying loan conditions. There are times when the borrower has to extend the loan repayment time. However, certain platforms are quite strict about their payback policy. Look out for such platforms if you do not find this condition fit. Some platforms allow you to adjust the predefined terms to meet your requirements, while others tailor your terms entirely.
We will summarise the primary factors where the limitations in the platform can be found and which can affect your choices directly:
- Geography and regulations
- Cryptocurrencies availability
- Fee structure
- Loan duration and locking periods
- Wallet support
Choose only those platforms that are regulatory compliant and fit your risk profile and monetary constraints.
There is no doubt that the crypto loan sector is expanding at an unprecedented rate. As technology improves, the popularity of crypto loans will only increase. However, if you ever wish to lend or borrow crypto assets on a crypto lending platform (CeFi or DeFi), you must thoroughly evaluate their pros and cons and how they fit your requirements. You must thoroughly research the platform by keeping the above points in mind.
If you are wondering how to start borrowing or lending crypto assets without collaterals, check out Teller now today.