What exactly are Payday loans and how do they work?

Published: Mon 5 Dec 2022, 9:05 PM

Last updated: Mon 5 Dec 2022, 9:11 PM

Payday loans are used for short-term lending whilst you are awaiting your pay. Payday loans can be a handy way to bridge delays in your pay. In this article we are going to discuss payday loans and comparing them against crypto loans.

Payday loans: how much do they cost?

According to Financial Conduct Authority (FCA) rules, payday loans are capped by law.

There is a limit on the amount of interest and default fees that can be charged.

It is common for payday loans to provide fast cash for small amounts that must be repaid in one lump sum. If they are not repaid in full by the due date, additional fees are typically charged and the due date is extended. Re-upping over and over again can result in increased fees. You can use a loan for anything you desire, even paying for a moped for sale.

Crypto loans: what are they?

Traders can obtain liquid funds with crypto loans without selling their cryptocurrencies. In place of cash or stable coin loans, they use their digital assets as collateral.

The reason individuals take out crypto loans instead of selling is that they expect their crypto asset's value to increase or because they want to hold the asset long enough to avoid short-term capital gains tax.

Types of crypto loans

Several types of cryptocurrency loans are available:

Collateralised loans

The most popular loans are collateralized loans, which are secured with cryptocurrency deposits. Overcollateralization means that borrowers can access only a certain percentage of their collateral (typically below 90 per cent loan-to-value) on most platforms.

Credit line for cryptocurrency

Cryptocurrency lines of credit are offered by some platforms instead of traditional loans with a predetermined term. Collateralised loans allow users to borrow up to a certain percentage of deposited collateral, but there are no set repayment terms, and users are only charged interest on funds withdrawn.

Uncollateralised loans

Personal loans and uncollateralised loans are similar in function, but uncollateralised loans are less common. To qualify for a loan, borrowers must fill out an application, provide proof of identity, and undergo a creditworthiness assessment. Because there is no collateral to liquidate in the event of a default, these loans carry a higher risk of loss for lenders.

Flash loans

Typically, flash loans are available on crypto exchanges and are instant loans that can be borrowed and repaid immediately. High-risk loans are usually used to take advantage of market arbitrage opportunities, such as buying cryptocurrency for a lower price in one market and immediately selling it for a higher price in another.

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