Are crypto loans a good idea?

Man using his phone in the officeImage: Man using his phone in the office

In a Nutshell

Crypto loans may have lower interest rates than traditional personal loans, but since cryptocurrencies can be volatile, they’re a risky form of debt.
Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. Information about financial products not offered on Credit Karma is collected independently. Our content is accurate to the best of our knowledge when posted.

About 16% of Americans say they’ve invested, traded or used cryptocurrency, according to a 2021 Pew Research Center study.

If you are one of the millions of people who own cryptocurrency, you may be interested in crypto loans as a way to get money quickly. Whether you own Bitcoin, Ethereum, Shiba Inu or Polkadot, you may be able to use your cryptocurrency as collateral to take out a loan.

But there’s risk involved with crypto loans. Unlike traditional currency, such as U.S. dollars, cryptocurrency accounts aren’t backed by the government. With a crypto loan, you don’t have the same consumer protections or regulations that bank loans provide. And cryptocurrency valuations can fluctuate wildly.

What is cryptocurrency?

Unlike traditional currency, cryptocurrency is a form of digital currency. It exists electronically, without a tangible bill or coin. Cryptocurrencies are used in electronic transactions, and can be used to buy or sell goods and services or to hold as an investment.

Cryptocurrencies are exchanged on decentralized computer networks between individuals with digital wallets, and the transactions are recorded on digital ledgers known as blockchains.

There are thousands of cryptocurrencies, but some of the largest by market capitalization are Bitcoin, Ethereum and Tether.

What is a crypto loan?

Crypto loans are a form of secured loan that allows you to borrow against the cryptocurrency you own. Instead of using your tangible property as collateral — such as a house or car — you use your cryptocurrencies to secure the loan.

While crypto loan repayment term lengths vary by lender, you can generally choose a term from three to 60 months. There might be loan minimums — often between $1,000 and $5,000 — and the maximum loan amount is based on a percentage of the value of your cryptocurrency. For example, you might opt for a loan that’s up to 50% or 60% of your cryptocurrency value.

While crypto lenders tend to be online lenders and specialty crypto companies, some traditional banks are exploring crypto-backed loans, too. Goldman Sachs, for example, has begun crypto-backed loan offerings.

Why are crypto loans appealing to some people?

  • Low interest rates — The average interest rate for an unsecured personal loan with a 24-month term was 8.73% as of May 2022, according to the Federal Reserve. By contrast, crypto loans can have much lower rates.
  • Quick loan disbursement — But with a crypto loan, you may receive the money as soon as the same day you apply. Keep in mind the exact timing will likely depend on your bank.
  • No credit checks — Unsecured personal loans are credit-based loans, meaning the lender will usually perform a hard credit inquiry as part of the application process — so if your credit is rough, you may not qualify. Crypto loans don’t typically involve credit checks, so you may be able to qualify for a loan even if you have bad credit or no credit history at all.

What to watch out for with crypto loans

When evaluating your loan options, keep in mind that crypto loans have some significant drawbacks.

  • The asset backing your loan isn’t protected — Unlike U.S. dollars deposited into an FDIC-insured checking or savings account, cryptocurrency isn’t backed by the government. If your account is hacked or the exchange platform goes out of business, the government isn’t obligated to help you get your money back, and you could lose your entire investment.
  • You could lose your investment — The lender can liquidate your cryptocurrency that is held as collateral to recoup its money if you fall behind on your payments.
  • Margin call — Cryptocurrency prices can go up and down a great deal. If the value of your collateral falls below a certain amount, the lender may require you to increase the amount of crypto put up as collateral (this is known as a margin call). If you don’t meet that requirement, the lender could liquidate some of your holdings.
  • Repayment terms can be short — Many crypto loans have relatively short loan repayment terms — sometimes 12 months or less. Unsecured personal loans can have much longer terms, some as long as 84 months, depending on the lender.

Are crypto loans taxable?

The IRS labels cryptocurrencies — and all virtual currencies — as property for federal income tax purposes.

If you only bought cryptocurrency with real dollars, you don’t have to report that activity to the IRS. But if you sold your cryptocurrency or traded for other types of crypto, a taxable transaction occurred and must be reported. And, if you sold your cryptocurrencies at a profit, you may have to pay capital gains taxes.

Alternatives to borrowing against crypto

If you don’t want to take out a crypto loan, but need cash for major expenses or debt consolidation, consider these alternatives.

  • Home equity loanYou may be able to borrow against the equity you’ve established in your house with a home equity loan or home equity line of credit (HELOC).
  • Unsecured personal loan — Instead of using collateral, unsecured personal loans are issued based on your credit health.
  • 0% APR credit card — Some credit card issuers offer 0% introductory APR cards for a promotional period — often six to 18 months — giving you time to pay off your balance without interest accruing.

About the author: Kat Tretina is a personal finance writer with a master’s degree in communication studies from West Chester University of Pennsylvania. Obsessed with her many side hustles, she focuses on helping people pay down their … Read more.