Crypto loans vs. traditional financing: key differences explained

Financing options are evolving, and for borrowers who don’t fit into the traditional banking mold, crypto lending is emerging as a powerful alternative. Whether it’s for personal loans or mortgages, crypto-backed loans provide access to liquidity without the typical hurdles of income verification, debt-to-income (DTI) calculations, or credit history reviews.

Traditional lending relies on a borrower’s full financial profile to assess risk. Crypto lending, on the other hand, is collateral-based, meaning if you have the required digital assets, you’re already pre-approved or over halfway to financing. But how does this impact rates, approval speed, and overall borrowing strategy? Here’s how crypto lending compares to traditional financing and who benefits most from this approach.

How traditional lending works

Traditional lenders evaluate borrowers through a comprehensive underwriting process. Loan approval depends on:

• Income verification: Pay stubs, tax returns, or financial statements.
• Credit history: FICO scores and past borrowing behavior.
• Debt-to-income ratio (DTI): The percentage of monthly income that goes toward debt payments.
• Collateral (for mortgages or secured loans): Property value and loan-to-value (LTV) ratio.

Because traditional lenders assess the borrower’s ability to repay based on income, employment, and creditworthiness, the process is document-heavy and can take weeks or even months for final approval. More importantly, traditional lending focuses on only one type of wealth, income. This narrow view excludes borrowers who may have significant assets but lack a steady paycheck or a conventional financial structure. Instead of considering a borrower’s total financial picture, banks drill down on monthly cash flow, often limiting opportunities for those with diversified assets.

How crypto lending works

Crypto-backed loans take a different approach. Instead of analyzing a borrower’s financial history, they focus entirely on crypto collateral, the borrower’s digital assets, such as bitcoin or ethereum. If a borrower pledges enough cryptocurrency to meet the loan’s required loan-to-value (LTV) ratio, the loan is issued.

There are two primary types of cryptocurrency lenders:

• Centralized crypto lenders: Platforms like Milo offer structured loan products using crypto collateral while still providing a streamlined, borrower-friendly experience.
• Decentralized finance (DeFi) platforms: Smart contract-based lending protocols that allow users to borrow directly from liquidity pools without intermediaries.

Regardless of the platform type, the main advantage remains the same: no income verification, no DTI calculations, and no credit score requirements. Approval is purely based on having the necessary collateral.

Key differences between crypto lending and traditional lending

The biggest differentiator is ease of qualification, traditional lenders need extensive financial proof, while crypto lenders only require collateral.

Another key contrast is the interest rate trade-off: traditional financing benefits from well-established capital markets where loans can be resold, keeping rates lower. Crypto-backed mortgages don’t yet have this secondary market, so rates tend to be higher. However, borrowers avoid selling their bitcoin or ethereum, maintaining exposure to potential asset growth. Over time, as institutional adoption grows and secondary markets develop, crypto loan rates are expected to become more competitive.

Is a crypto loan or crypto mortgage right for me?

For some borrowers, crypto-backed loans make more sense than traditional financing.

Imagine a borrower with a high-value crypto portfolio but limited fiat liquidity. Traditional banks assess income and DTI, making qualification difficult, even if the borrower has substantial assets. In order to transact, they would need to sell their bitcoin or ethereum to demonstrate liquidity, which means they not only lose future appreciation potential but also incur taxes on the sale. This means they would have to sell more than the amount they actually need to finance to account for the tax hit.

A crypto mortgage removes these barriers, offering a straightforward way to access funds while maintaining exposure to digital assets. This approach is particularly beneficial for borrowers whose income doesn’t reflect their total wealth, such as those with fluctuating earnings or a non-traditional financial structure. A mortgage for crypto investors is also an advantage for global borrowers who don’t meet U.S. lending criteria, as it doesn’t require a U.S. credit history.

With no DTI requirements and no need for tax returns, crypto-backed financing unlocks opportunities for borrowers who otherwise might not qualify through traditional routes.

Potential risks and considerations

Crypto lending isn’t without its risks. Borrowers need to consider:

• Market volatility: Crypto-backed loans use digital assets as collateral, which means price drops could trigger margin calls or forced liquidations. However, Milo’s centralized finance (CeFi) model ensures that there are no automated liquidations. A dedicated team actively manages loans, providing borrowers with options to safeguard their assets and minimize the impact of market fluctuations.
• Interest rate comparisons: While crypto loan rates are currently higher than traditional loans, the trade-off is avoiding asset liquidation. As the industry matures and institutional participation increases, this is expected to change.
• Regulatory uncertainty: Cryptocurrency loan regulations vary by country, and the landscape is still evolving.
• Security risks: Borrowers should ensure they use reputable cryptocurrency lenders with strong security measures to protect their collateral.

The future of crypto lending in mortgage financing

Crypto-backed mortgages are already gaining traction, offering a new way for digital asset holders to invest in real estate. As regulatory clarity improves and institutional adoption grows, more lenders are expected to enter the space, increasing competition and driving better rates. Stronger capital markets for crypto-backed loans will also allow lenders to offset costs, making borrowing more affordable.

Another key development will be hybrid lending models that combine elements of crypto collateral loans and traditional financing. These models may provide borrowers with more flexible options, allowing them to use both crypto-backed and traditional assets as collateral. As these changes take hold, borrowers with substantial bitcoin or ethereum holdings will have even more opportunities to leverage their assets for homeownership and investment.

Crypto lending is transforming access to financing by eliminating traditional barriers. While interest rates may still be higher, the ability to qualify without income verification, credit checks, or DTI calculations makes it a compelling option for certain borrowers, especially global investors and those with substantial crypto assets.

As the market continues to evolve, the gap between crypto financing and traditional lending will shrink, creating new possibilities for borrowers worldwide.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.