This is a detailed guide to Binance’s Crypto Loans feature where you will learn what crypto loans are, why you may want to borrow digital assets and how to do it on the leading cryptocurrency exchange. You will also learn about complex crypto borrowing concepts such as Loan-To-Value (LTV) ratio and liquidation.
What are crypto loans?
The traditional financial (TradFi) world can be a little restrictive regarding financial access, with most institutions employing arbitrary policies of lending to their customers. Banks often lend based on the customers’ credit histories.
The problem with such a system is that it locks out legitimate borrowers who may not already have a credit history, such as immigrants. Add on to that the high costs of loans aided by hidden charges, and it’s easy to see why the traditional loan facilities are in dire need of an overhaul.
Crypto loans help solve many of the shortcomings of conventional loans by providing convenience, cost-effectiveness, and accessibility. Interestingly, three of the main drawbacks of borrowing from banks are now the selling points for blockchain loans.
If you are unfamiliar with digital asset loans offered by blockchain-related companies, keep reading to learn why you need to pay attention to them. In this guide, you will learn what Binance’s Crypto Loans products are and why you may consider choosing Binance over its competitors when borrowing digital assets.
You will also learn step by step how to borrow and repay cryptocurrencies or renew loan agreements on Binance exchange. Binance makes it easy for its users to access credit without considering their financial histories.
So long as you have sufficient collateral, you can borrow any asset supported on Binance Crypto Loans product while ‘HODLing’ your favorite digital coins and tokens.
What is Binance Crypto Loans?
Similar products exist on the internet where you can take up crypto loans, but, as we will discuss later, there are several advantages to borrowing with Binance. Unlike the traditional financial industry, which heavily relies on an individual’s credit history to determine their creditworthiness, crypto loans bypass the whole credit history feature.
The main difference between centralized and decentralized finance (DeFi) is that the custodians care about who you are versus what you have, respectively. The latter opens up more opportunities for financial inclusion, which is the biggest draw of DeFi compared to its conventional counterpart.
Why do customers use crypto loans?
The reasons why individuals take out a cryptocurrency loan vary from person to person, but the most typical are as follows:
Provide liquidity – crypto-assets can be held over the long term for increased returns, and selling them midterm may not be ideal for some people. Therefore to avoid selling their assets, some people opt to use them as collateral to take up a loan which gives them the required liquidity.
Hedge against financial risks – cryptocurrencies are considered highly volatile, and crypto loans have successfully been used to hedge against any potential losses from value erosion. For example, if an investor expects a price fall in an asset they are holding, they can take up a loan using the asset as collateral and use it to buy more of the asset in the future if its value falls.
Accessibility – sometimes, people turn to crypto loans because they cannot get a loan with traditional credit institutions because they lack a credit history or their credit scores make it expensive to get conventional loans.
Convenience – traditional credit facilities have several requirements to fulfill before qualifying for a loan, whereas crypto loan products do not. Centralized crypto exchanges such as Binance might require their users to comply with identity verification provisions, but that’s about it. Decentralized platforms require even less from their customers, typically only requesting them to make the collateral deposit to take up a loan. Crypto loans are just that much faster and easier to pick up, making them more convenient.
Why borrow with Binance?
There are several reasons why a borrower may want to take a loan from Binance over other places. These reasons include:
Security – Binance is the leading crypto trading platform by daily trading volume and the number of users. It has invested a lot in its platform by beefing up its security and user experience. With Binance, you also get peace of mind knowing that your assets are insured, and there are significantly fewer chances that an exit scammer will con you.
Part of an ecosystem – the exchange has created a diverse ecosystem of several products and services, allowing its customers to interact with all of its features with only a single account. With a verified Binance account, the user can buy, trade, exchange, sell, mine, save, lend and borrow crypto, among other functions.
Cost – crypto loans are typically less expensive compared to conventional loans from the bank, but rates charged by Binance to its borrowers are even competitive within the crypto loans space.
Convenience – Binance offers a better user experience through its easy-to-use mobile Lite interface, ideal for beginners and experts alike. Anyone can access or repay a crypto loan on the go through their mobile devices. Binance also provides the highest liquidity for most crypto assets, and it is easier to get a loan for more assets than other platforms.
How to use Binance Crypto Loans
The Binance Crypto loans product may be simple to use for an expert, but it could be daunting for most beginners to understand all the concepts. Let’s take a closer look at what all the fancy terminology used means before showing you the step-by-step guide to borrowing from Binance.
Binance Crypto Loans Interest
Binance charges interest rates by the hour, which is cost-effective for users because you only get to pay for the number of hours you keep the borrowed funds. Any period that does not equal a full hour is rounded off to the next hour.
For instance, if you borrow some assets for seven days (which is the shortest term period supported) but return the funds after 2 hours 15 minutes, you will pay interest equivalent to a 3-hour loan.
Interest rates vary depending on the asset borrowed and the duration of the loan but generally, crypto loans are considerably cheaper than conventional loans. For example, the interest rate charged on a BTC loan is 0.002083% per hour or 0.0500% per day.
BNB, Binance’s native crypto asset, has relatively higher rates than other digital assets, with interest on the asset pegged at 0.033333% per hour or 0.8000% per day. From this illustrated discrepancy between the interest rates for borrowing BTC and BNB, it’s clear that you can save a lot of money by borrowing lower interest rates and exchanging them for other assets using the exchange feature.
What is Loan-To-Value (LTV)
Binance uses the Loan-to-value (LTV) ratio to determine the number of assets a particular user qualifies to borrow. The LTV is a simple method to measure lending risk.
LTV is a truncated phrase that means loan value to collateral value. It is calculated by dividing the value of the loan by that of the collateral.
LTV = Loan Amount / Collateral Amount x 100%
(Loan Amount = Principal + Interest)
For example, let’s take the price of Bitcoin to be $50,000 (2021-10-5), and the borrower has 1 BTC, which they would like to use as collateral for a USDT loan. The initial loan LTV for using BTC as collateral is 65% which means that your loan amount cannot be more than 65% of the collateral value.
In this case, with 1 BTC, the user can borrow upto 32,500 USDT (50,000 * 65%).
Binance allows for loan rebalancing as the value of the crypto under collateral and the one borrowed value in relation to one another. For instance, in the example above, the value of BTC could fall, and this raises the LTV number.
At 75% LTV, the exchange will trigger a margin call to the borrower to add more collateral. If the borrower lets the LTV value rise to 83%, Binance will automatically liquidate their loan, selling the collateral to repay it automatically. A margin call is a notification to the borrower requesting them to top up their collateral amount to avoid liquidation.
What is Liquidation?
Liquidation is the process of settling a debt or converting assets into cash. In Binance Crypto Loans, it refers to the automatic debt settlement process using the borrower’s collateral.
The following section will highlight a simple way to adjust your collateral amount to avoid liquidation.
NOTE: Binance charges a 2% liquidation fee.
Step-by-Step Guide to Borrow a Crypto Loan on Binance
To start borrowing assets on the Binance Crypto Loans page, follow these simple steps:
Step 1 – Navigate to the Crypto Loans page.
From the Binance homepage, click on the [Finance] tab at the top of the main navigation bar and select the [Crypto Loans] option from the dropdown menu.
Step 2 – Fill out the loan form.
On the crypto loans page, Binance will prompt you to specify which asset you wish to borrow and how much of it you want to borrow together with the asset you want to use as collateral.
After specifying the assets to borrow and use as collateral, choose the loan period amongst the available options.
Binance allows its users to borrow loans for loan terms of 7, 14, 30, 90, and 180 days. However, there is no penalty for settling debt before the expiry date, and if you do, you only get charged for the number of hours you had the loan.
On the right side of the loan page is the LTV breakdown, which shows the initial LTV ratio, the margin call LTV and the liquidation level. These levels vary amongst supported assets, so pay attention to this figure as a yardstick to measure the risk you are taking with your collateral.
Below the LTV section is the liquidation price for the asset you borrow and the interest rate for your loan. Finally, Binance will display the total interest amount and the total repayment amount or loan amount.
Click [Start Borrowing Now] to continue.
Step 3 – Confirm loan particulars.
In the last stage, Binance will prompt you to confirm that all the loan details are correct and agree to the loan terms. You can click through the available link to read the loan terms before confirming.
If you’re satisfied with the loan terms, click [Confirm] to borrow the funds. Binance will deposit them into your ‘Fiat and Spot’ wallet from where you can use them as any of your other unborrowed assets, including trading, staking, lending, selling, or even withdrawing to an offline wallet.
How to repay your Binance Crypto Loan?
You can repay your crypto loan before, on, or after the loan expiration date, but that last option is costly. For short-term loans (i.e., 7 and 14 days), Binance provides for a 72-hour extension of the loan repayment while longer loan terms have a 168-hour loan repayment extension. Binance charges three times the standard interest rate applicable to the borrowed asset during these loan extension periods.
When you are ready to pay your debt, follow these steps:
Step 1 – Navigate to the Crypto Loans page.
Here, select the [Ongoing Orders] tab to view all loan orders currently unpaid.
Locate the loan you wish to repay and click on the [Repay] button to the right side of the loan details.
Step 2 – Pay the loan.
Clicking the Repay loan button from the previous step loads up a dialog box to specify how much you want to repay and whether to use the assets under collateral.
In the first box highlighted in the image above, you can type out the exact amount you want to repay or choose from the preset ratios below. Click [Confirm Repayment] to make the repayment.
Binance will deduct the repayment amount from your ‘Fiat and Spot’ wallet balance for the asset borrowed, so make sure that there is enough of that asset to settle the repayment amount you select.
Otherwise, you can opt to repay using the collateral amount by selecting the checkbox next to the [Repay With Collateral] option as shown below.
Confirm repayment and Binance will deduct the equivalent of your debt amount from the assets under collateral. The balance will be deposited into the ‘Fiat and Spot’ wallet.
How to adjust collateral to avoid liquidation
Following a margin call, the borrower can log into their account and transfer funds into their ‘Fiat and Spot’ wallet, from which Binance will automatically deduct to serve as additional collateral. Here is the simple process to adjust your loan’s collateral or to achieve a healthy LTV ratio:
Step 1 – Navigate to the ‘Crypto Loans’ page.
On the ‘Crypto Loans’ page, select the [Ongoing Orders] tab to show the loans you are currently holding. Click on the [Adjust LTV] button next to the loan whose collateral you wish to top up.
Step 2 – Deposit more collateral
On the ‘Adjust LTV’ screen, you can use the slider to choose the LTV ratio you are comfortable with, and Binance will calculate the number of assets that will achieve that ratio. Or else, you can input the exact figure you want to deposit from your wallet in the [Collateral Amount] field.
Click on the [Add Collateral] button, allowing Binance to deduct the funds from your Spot wallet automatically. The exact process works to reduce the amount of collateral if the LTV is too low, meaning that there is more collateral than necessary. To remove, click on the dropdown menu that says [Add] and instead select [Remove] from the list.
Borrowing from Binance through the Crypto Loans product is simple and only takes a few easy steps. As we have outlined above, anyone with a verified Binance account can use the product.
Crypto loans have several advantages over conventional loans, including cost-effectiveness, ease of accessibility, and convenience. Furthermore, Binance is one of the best places to borrow crypto loans due to its intuitive interface, low-interest rates, and reliability.
If you are yet to borrow any cryptocurrency asset, try it out by following the straightforward steps outlined above.
Frequently Asked Questions on Binance Crypto Loans
What is Binance Crypto Loans?
Binance Crypto Loans is a debt product offered by the leading cryptocurrency exchange allowing its users to borrow crypto assets using other digital asset deposits as collateral.
Who can borrow on Binance Loans?
Anyone with a verified Binance account qualifies to borrow funds on Binance provided they have enough assets to act as collateral.
How do interest rates for crypto loans compare with traditional loans?
Crypto loans’ interest rates are much lower, making them cheaper to service and easier to access.
Are crypto loans risky?
Yes, crypto loans carry higher risks compared to conventional loans because crypto assets are highly volatile assets. However, if you borrow and use stablecoins as collateral, you can reduce that risk significantly.