DeFi loans provide students who hold crypto assets with several options for repaying their college loan through DeFi loans. Here, you will find out how these loans can help pay off student debt more efficiently.
What Is A DeFi Loan?
Blockchain technology enables various financial applications that resemble traditional banks in terms of decentralized finance applications (DeFi). Decentralized finance applications operate as smart contracts and automate and execute financial transactions without depending on centralized third parties like traditional financial services do.
DeFi loans provide an innovative, decentralized and seamless method for lending or borrowing money while giving you full control of your funds.
DeFi loans are protected by smart contracts to remain overcollateralized according to a percentage set by its lending protocol, using cryptocurrency assets as collateral. Your collateral must equal or surpass the loan amount in order to get one.
MakerDAO’s DeFi lending protocol requires borrowers to post 150% collateralization for any loans taken out – meaning at least $150 worth of ETH is necessary in order to borrow $100 worth of Dai.
DeFi lending protocols use governance tokens as an incentive when people take out loans through them, incentivizing liquidity and rewarding users who contribute to the ecosystem. This practice allows DeFi protocols to motivate users who contribute funds by rewarding borrowers with tokens – this strategy works very effectively at creating liquidity within an ecosystem and rewarding those contributing users who support it.
Investors can make money lending cryptocurrency through DeFi loans. Smart contracts automatically distribute digital assets among borrowers while lenders can lock away some in lending pools to generate interest payments.
Is There A Way To Pay Off Student Loan Debt Using DeFi Loans?
DeFi lending allows you to take out a loan using crypto assets as collateral for a student loan repayment loan, without needing to sell your crypto tokens in order to generate funds – meaning no capital gains taxes on sold crypto tokens!
Investing your tokens, typically stablecoins, in lending pools to earn interest is another viable solution. At an appropriate moment in time, convert this interest income to fiat currency and apply it towards paying back your student loan debt.
DeFi lending protocols offer open and permissionless access for anyone with a crypto wallet to borrow or lend money through open lending protocols like DeFi lending protocols. Unlike traditional lenders who require certain qualifications (creditworthiness, income stream etc) for loans to qualify for one, DeFi loans can be obtained anywhere without providing KYC data or personal details about yourself – making DeFi loans attractive alternatives to traditional lending institutions that may require creditworthiness checks, income streams etc to qualify for loans.
Your student debt may be eliminated with DeFi loans and cryptocurrency wallets. DeFi loans allow you to maintain control over your assets while their lending protocols provide faster loan disbursement times than traditional financial institutions with their conditions and regulations.
How Can A DeFi loan Help You Pay Off Your Student Loans?
Assume you need to pay off a $12,000 student loan. Furthermore, let’s assume that over time you have become active in crypto world and amassed $20,000 worth of ETH – the perfect combination.
As opposed to selling $12,000 worth of cryptocurrency and paying off all debt at once, this approach comes with certain drawbacks.
Selling 60% of your crypto portfolio effectively reduces your stake in the crypto market and will significantly limit any profits should crypto markets turn bullish again. A capital gain tax may also apply when you convert crypto holdings to fiat money holdings.
Do not follow that route: with DeFi lending protocols you have another option that may give you more options; deposit $20,000 worth of ETH as collateral into a DeFi lending protocol and receive a $12,000 loan in stablecoins in return. Once converted back to fiat currency for repayment purposes you don’t need to worry about fluctuations in price fluctuations as the loans themselves often use stablecoins denominated in your local currency (stablecoins often have consistent price levels across lenders).
As there is no set repayment schedule, you have complete flexibility in how and when you repay your DeFi loan; just ensure your collateral remains sufficiently valuable in order to prevent liquidation of it. Keep an eye on this carefully.
As crypto assets can be unpredictable, it’s crucial that you stay sufficiently overcollateralized. To prevent their liquidation, either pay back some loans or expand your crypto collateral by adding to it by buying more.
Good news is that your debt repayment can happen at your own pace. In addition, any governance tokens or interest earned can help cover some of the debt – and should the price of crypto asset held as collateral increase, its size will actually decrease!
Paying Off College Debt With A Crypto Loan May Be Risky
There are certain risks involved when taking out a DeFi loan to cover college debts.
Variable Rates
Cryptoasset supply and demand drive the variable rates of DeFi lending protocols, with higher APRs signalling fewer lenders available and thus making DeFi loans more expensive for borrowers.
Liquidation
Liquidation Once a DeFi lending protocol reaches its liquidation threshold, they sell off collateral in order to cover borrower debts. Let’s say you own $150 worth of ETH and want to borrow $100 through MakerDAO; should the price of ETH fall below $150 then you will be subject to an 13% penalty fee.
Smart Contract Vulnerabilities
Unsafe smart contract codes have compromised users’ crypto assets. Errors within DeFi lending protocols have opened them up to potential security breaches that could result in the total loss of all deposits.
