Before I begin, I want to cover my ass; this isn’t financial advice. This is just me looking at the math on certain financial products and presenting it for informational purposes. If you are taking financial advice from random bloggers online, you shouldn’t be surprised if you lose your money.
All I am doing is sharing my thoughts and tactics I am looking at as a crypto holder.
I recently spoke about the tax implications for those who have been buying crypto and want to cash out and the option of taking out a loan against your cryptocurrency assets.
I did review the potential cost saving on taking a loan versus selling your crypto, but what I didn’t speak about was the liability you have to deal with when taking a loan.
When selling your crypto after paying your taxable amount, you have your cash clean and clear, do whatever you want to do.
When you take a loan, there’s still a balance that needs to be repaid, or you would lose your collateral.
Also, if you’re loan to value ratio breaks as the price of crypto tanks. You will be margin called to post more collateral to maintain the loan value ratio or extend the repayment period.
All this can be a bit of a headache in terms of admin when compared to straight sales.
Another issue with taking out a crypto loan is the high-interest rate on borrowing. Suppose we look at the rates given to us by popular CE-FI companies proving crypto-backed loans. You can see the rates are pretty steep when compared to legacy financial products.
|Platform||Asset||Interest rate for a year|
Paying such obscene rates on a short term loan may not be that painful, but surely reducing your loan repayment value could net you some extra income.
So it got me thinking, what if you took out a loan against your Bitcoin, then refinanced it by taking out a second loan with your bank.
Paying back your crypto loan in full and settling it to avoid the interest payment and then paying the lower rate back to your local bank.
I did some digging as to local banks term loans; these are unsecured loans you can take out just because you have an income.
|Bank||Repayment period||Interest rate|
|Standard Bank||12 months||24.50%|
Let’s go back to my old calculation using a $5000 fee; if I took out a $5000 loan straight with these companies, I actually get a better rate than a personal loan with a SouthA African bank.
South Africa may not be the best option, but there is defiantly a viable cost-saving available.
In my case, taking a glance at the products I have available locally, an overdraft facility at 8.50% would be the best rate.
I would also need to factor in things like the monthly service fee for keeping the loan open and the Once-off initiation fee for opening the loan, which will eat into my margins.
Effectively for me, borrowing against my crypto is a far better deal than any of the local loan products I can use with traditional banks.
If we compare it to the likes of the US, UK and Europe, where interest rates are absurdly low, you could refinance your crypto loan with a traditional loan.
I personally just pulled some UK banks rates, and you can get access to a personal loan at 3.0% APR. 595 basis points lower than the best rate you can get when borrowing against your Bitcoin.
Now here is where I think it gets interesting. Imagine for a second loan could be packaged up and sold in the open market. Let’s say I would like to refinance my crypto loan, but the South African bank arbitrage with their interest rates isn’t that great.
Imagine I could instead buy out a from someone in another country with a lower interest rate. Let’s say the UK and I get a 1% interest rate.
I could then take out the crypto loan, take the balance, use it to buy someone else’s loan, and repay that lower rate instead of my rate.
Imagine how quickly that would balance out interest rates across banks, fintech companies and countries. People who want better savings rates could save in other countries bank accounts while looking to borrow. Instead, you could buy other citizens loans.
What do you good people of HIVE think?
So have at it, my Jessies! If you don't have something to comment, "I am a Jessie."
|Safely Store Your Crypto||Deposit $100 & Earn $10||Earn Interest On Crypto|
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