As experts in lending, we know how powerful using debt (responsibly) can be. We hate to see crypto investors carrying high balances on their credit cards, struggling to pay off their taxes from trading crypto, or and worst of all, liquidating their crypto because they need cash.
That’s why BlockFi was created. Part of what we do is try to educate our clients on the key things to pay attention to when you apply for a blockchain backed loan. Don’t just accept what a lender offers you. It’s important to think through the cost-benefit analysis of your loan terms.
Many people don’t know that there are some basic rights as a consumer. Lenders can try to take advantage of that. When comparing the different crypto lenders, here are the top questions you should ask.
How does interest on a loan work?
There are three types of interest that lenders use. We’re going to break those down for you so that you don’t end up paying more than what you signed up for:
1. Compound Interest
Some lenders advertise extremely low rates but don’t tell you that the interest is compounding. What this means is that instead of charging you interest on the money you took out from them, they are actually increasing your loan balance on a daily basis so that you end up paying much more than the headline rate.
Compound interest is illegal in most U.S. states and can get borrowers into an unsustainable amount of debt. Taking out a compounding interest rate loan is not recommended.
2. Fully Amortizing Interest
A fully amortizing loan asks you to pay back a portion of your loan amount with every payment. The benefit is that you pay less interest than an interest only loan. The downside is that your payments are much larger and you don’t have the choice to pay less one month if you’re tight on cash. Some people could argue that if your loan is collateralized, there is no reason for a lender to ask you to pay back the principal portion, because this is guaranteed by your collateral. However, some crypto lenders have stuck to this model, despite that.
3. Interest Only Loans
This type of interest has the smallest monthly payment. You only are paying interest on the money that you borrowed. With an interest only loan, you can always pay back more principal if you want to. If you have extra cashflows, paying back more of your loan makes sense so that you pay less interest overall. This type of loan offers the most flexibility. Because this limits the monthly payment burden on the consumer, BlockFi only offers interest only loans.
How do prepayment penalties work?
Some lenders can charge fees for paying your loan back early. The thought process behind this is that the client committed to paying back a certain amount of interest, and they should pay it back no matter what. This comes down to the lender wanting to maximize the return for lending out their money.
Prepayment penalties are illegal in most states, such as Illinois and Texas. If your lender is trying to charge you a prepayment penalty, you should complain to the CFPB. They’ll make sure you don’t get charged illegal penalties.
What is an origination fee?
What most people don’t realize is that lenders charge an origination fee, which is basically just interest paid up front. When you’re comparing interest rates, you should take into account the loan’s origination fee.
The combination of an interest rate and origination fee is an APR (annual percentage rate), which is the full rate amount you are paying for your loan. Learn more about interest rates, APR, and how to understand a loan offer here.
How does a crypto loan token work?
Many lenders have a token in their business model. The token can be required to take out your loan or to unlock certain features on a platform. These lenders typically advertise a lower interest rate if you use their token towards a loan with them. Before you take out a loan, make sure you understand the interest rate you are getting without a token if you don’t plan on buying one. Additionally, it’s important to check if the advertised offer is available, as some token lenders market rates that are not possible to get on their platform.
BlockFi does not issue any tokens and does not have an ICO because we don’t believe it makes sense in the world of lending. We launched our entire platform without one and offer industry leading pricing and compliance without one.
What laws protect borrowers?
In the U.S., borrowers have a lot of legal support to make sure lenders are not taking advantage of consumers that do not come from a financial background. Every lender should include a TILA disclosure with your loan – this is a one page summary of exactly how much you are agreeing to pay for your loan. Make sure your loan agreement includes this. If it does not, ask why.
Each state has consumer protection laws in place that determine how much lenders can charge for a loan. For example, in New York, lenders cannot charge more than a 16% APR without a lending license. If your lender is charging you more than 16%, you should file a complaint here for New York and directly with the CFPB. If your lender is charging you 16% on a compounding rate, that is also illegal.
If you need help understanding the laws in your state, email us at firstname.lastname@example.org and our head of compliance can walk you through your state’s regulations and help you understand your loan’s terms.
At BlockFi, we put a lot of work in to trying to have the best rates in the market so that you can get the most use out of your crypto. We’d love to hear back from you and see how we’re doing! Applying takes less than two minutes and clients can go from application to funding in as few as 90 minutes. Click here to learn more about how a BlockFi loan works.