What Is An NFT Loan, And How Do They Work?

Learn How To Use Your NFT as Collateral And Borrow Cryptocurrency

DeFi (decentralised finance) is revolutionising the NFT world. To understand what an NFT loan is, it is important you have a basic understanding of what DeFi is.

What is DeFi?

Decentralized finance is similar to traditional finance but on the blockchain. DeFi platforms (businesses) offer NFT investors financial products without the need for a bank (middleman) or financial institution.

As long as you have access to the internet and an NFT deemed worthy of borrowing against, you can offer your NFT as collateral for a loan within a matter of minutes. You do not need to wait for approval from a centralised authority.

DeFi allows anyone to borrow, lend, rent, stake, or trade NFTs and cryptocurrencies. All without the need for a financial institution like a bank.

What Is A DeFi Loan?

Although NFT loans are a new concept, there are numerous NFT loan platforms available to you. These platforms allow NFT owners to borrow against their NFT. In essence, an NFT loan or short-term mortgage.

When you put your NFT up as collateral, you receive cryptocurrency or fiat currency in return.

How Do NFT Loans Work?

DeFi lending works using transparent, self executing smart contracts. These smart contract open and close (terminate) on their own (once all terms are met) without the need for supervision.

NFT lending platforms will lend against certain NFTs. Each loan platform may vary slightly, including the conditions and the amount they are willing to allow NFT holders to borrow.

Usually borrowers can receive a loan of around 20% to 50% of the NFTs value, and the NFT is held in escrow during the loan period.

For example:

If you own an NFT worth $20,000, you can borrow $10,000, and if the rate is 20%, you will owe $2,000 in interest. Therefore, you will need to repay $12,000 to receive your NFT back when the loan expires.

Borrowers usually do not need to ring up a company and negotiate the terms, the loan is executed without an intermediary. The smart contract does the heavy lifting for you. However, some lending platforms like Nexo will allocate a manager to you, and you will receive a quote from them.

The loan rates vary with each DeFi platform. Loan payments can range from 20% upwards and often depends on how popular and valuable your NFT is.

The loans smart contract gives NFT investors complete control over their funds. Once you agree to the loan, your NFT is sent to a smart contract. This contract acts as an impartial third party program. It facilitates the entire lending and borrowing process.

The lending platform will decide what is the fair value of your NFT. They look at the asset’s past performance, floor price, and sales history of the NFT collection.

Once the terms are agreed upon, the NFT is transferred from the borrower’s digital wallet to an escrow account, and the smart contract is deployed.

Why Do People Take NFT Loans?

  • Many NFT holders prefer to remain anonymous, and most DeFi lending platforms do not ask for personal details.
  • Often an NFT holder requires a short-term loan quickly. Using smart contracts a holder can often receive a loan within a few minutes.
  • No credit score is needed.
  • Most lending companies do not ask why you need the loan. As long as your collateral is sufficient, they do not care.
  • NFTs are notoriously illiquid, and it may make more sense to take a loan out rather than wait to sell your NFT.
  • Some NFT investors may have most of their capital tied up in one NFT and wish to access funds to purchase another NFT or cryptocurrency.
  • When it comes to tax season, if you sell your NFT directly, you will trigger a taxable gain. Just as with stocks and other assets, investors instead can take a loan that is tax deductible and may prove a more efficient method to access some of the NFT’s value. The loan rate must be favourable to make this a viable option.
  • Although not common, some borrowers may receive a favourable rate for their NFT loan and then use the crypto they receive to stake for a higher return than the monthly repayment. Thereby making a small monthly profit above the loan rate. We do not suggest you do this a yield farming is not a sleep well at night investment.
  • During a bull run, experienced investors will take loans out against their top-tier NFTs. They use the borrowed cryptocurrency to speculate on the crypto and NFT markets. If successful, not only did they make a profit as their lent NFT increased in value, but they also make money on the increase in value of the cryptocurrency they borrowed or speculated on. This is best left to the professionals.

You will need to own a sought-after and often bluechip NFT, as loans are rarely given out to new NFT collections with an unknown demand and price history.

What Are The Dangers Of NFT Loans?

  • You need to ensure you only use top-tier loan platforms. If you use an unknown NFT lending platform, your NFT may be at risk if they close down or scam you.
  • The platform may disappear or go bankrupt.
  • If you use the borrowed crypto unwisely and lose it, you may not be able to repay the loan.
  • The price of your NFT drops in value, and depending on the loan agreement, you may have to repay the loan or add more collateral.

Before taking out a loan, you must be aware that if you can not repay the loan or interest, the lender is entitled to keep your NFT!

The Future Of NFT Loans

In the future, we will see NFT’s real estate deeds become a thing. This is where the owner of an NFT is the owner of a real-world property. We might then see loan mortgages become a thing using your home (NFT) as collateral.

Finally …

NFT loans are a new concept and are in their infancy. Over the coming years, we will likely see the system become safer, insured, easier to use, and increase in popularity.

You can read more articles about NFTs in the blog section of our website.

You can also visit our NFT resource directory to find useful links to help you invest in NFT more effectively.

Visit us today at spendingcrypto.com

Author:
Jonathan Titley

Founder:
spendingcrypto.com

Co-founder:
https://fomomagazine.io
(NFT industry magazine and project reviews)

Disclaimer:

All information in this article is for educational purposes only.

Jonathan Titley
Author: Jonathan Titley