Eligibility Criteria for Crypto Loans

Crypto loans have become popular as a way of using digital currencies to secure a loan without having to sell the assets. However, when it comes to getting a crypto loan the process is a bit different as there are some requirements that must be met. In this article we give you a clear description of the usual conditions that must be met by borrowers before they can be granted a crypto loan, thus serving as a useful guide to anyone who wants to learn about this type of financial service.

1. Ownership of Eligible Cryptocurrencies

The basic precondition for getting a crypto loan is to have the cryptocurrencies that are approved for collateral. These are digital assets which are used as security for the loan.

Key Points

• Accepted Cryptocurrencies: 

Crypto loan platforms usually take the top-tier cryptocurrencies such as BTC, ETH, and well-known stablecoins as USDC and DAI. Some of the platforms might also allow for other types of cryptocurrencies to be traded as well.

• Verification of Ownership: 

To confirm ownership of the coins, the borrowers need to send a certain amount of cryptocurrency to the wallet owned by the lending platform.

2. Minimum Collateral Amount

Borrowers are expected to provide a form of collateral in the form of cryptocurrency that must meet a minimum threshold. This is important to ensure that the loan is well secured so that in the event of default by the borrower the assets can easily be sold to recover the amount of money borrowed.

Key Points

• Platform-Specific Requirements: 

Some platforms have minimum collateral requirements for the various levels of membership. For instance, some of these might need the user to have at least $500 equivalent in cryptocurrency, while others may have a higher or lower limit.

• Loan-to-Value (LTV) Ratio: 

This formula shows the relationship between the amount that one can take as a loan and the value of the security. Standard LTV ratios are between 50/100 and 70/100, so if you put up $10 000 in crypto assets, you may borrow between $5 000 and $7 000.

3. KYC (Know Your Customer) Verification

KYC verification is standard on most centralized platforms for lending cryptocurrencies. It involves supplying identification details to ensure that the borrower’s identity is established.

Key Points

• Documentation: 

Applicants are required to submit identity documents like an ID, utility bill, and a photo of themselves.

• Purpose: 

Fraud, money laundering, and other unlawful activities can be minimized by the use of KYC because the borrower’s identity is well-checked.

4. Residency and Jurisdiction

Certain crypto lending platforms may have residency requirements based on regulatory restrictions in different jurisdictions.

Key Points

• Eligible Countries:

Platforms may only offer services to residents of specific countries. For example, some platforms exclude users from countries with strict crypto regulations.

• Proof of Residency: 

Borrowers may need to provide proof of residency, such as a utility bill or bank statement, to confirm their eligibility based on location.

5. Age Requirement

Borrowers typically need to be of legal age to enter into a loan agreement.

Key Points

• Legal Age: 

The minimum age requirement is usually 18 years, but it can be higher depending on local laws.

• Verification: 

Age is often verified during the KYC process using the provided identification documents.

6. Credit Score (Optional for Some Platforms)

While most crypto loans do not require a traditional credit check, some platforms might consider the borrower’s credit score to determine loan terms.

Key Points

• Credit-Based Terms: 

Some of the platforms that use credit scores can provide the consumers with better interest rates or a higher loan limit for those with good credit scores.

• Alternative Metrics: 

Most crypto lending platforms will use the value of the collateral offered as security to lend instead of credit scores, hence, it is easy for people with low or no credit rating to access credit from such platforms.

7. Platform-Specific Requirements

Every crypto lending platform may have other requirements that need to be fulfilled by the borrowers.

Key Points

• Platform Policies: 

Borrowers need to look at terms and conditions of the platform to see if there are specific conditions like maintaining a balance of native tokens of the platform.

• Membership Levels: 

A few platforms have variations in the loan terms depending on the membership tiers or incentives that may involve holding or locking the platform’s tokens.

8. Maintenance of Collateral

Borrowers are required to keep the value of the collateral intact during the time of the borrowing of the loan so as to avoid margin calls or even the sale of the collateral.

Key Points

• Collateral Value Monitoring: 

Platforms are always checking the value of the collateral that is being provided. Large depreciations may lead to the need to put more security for the loan to be granted to the borrower.

• Margin Calls:

If the value of the collateral drops below a specific level, the platform might send a margin call to the borrower to bring more collateral to the loan-to-value ratio.

9. Repayment Terms

Repayment terms are another requirement that need to be understood and agreed upon by the applicant.

Key Points

• Interest Rates: 

Lenders have to accept the interest rates that may be either floating or a fixed one based on the platform.

• Repayment Schedule: 

All the aspects of repayment such as the time and manner of payment should be well understood and agreed between the borrower.

Conclusion

To be able to obtain a crypto loan, one has to meet the following basic requirements; possessing eligible cryptocurrencies, submitting identification documents to meet the KYC process and the value of the collateral. Thus, knowing these requirements, borrowers will be able to apply their digital assets more effectively and responsibly. As it is always the case, one needs to take their  time and search for the right platforms to borrow from in order to avoid getting into the wrong hands. For more information visit our website.