Today, NFTs (or non-fungible tokens) make up a sizable portion of the cryptocurrency market. They've found a home in industries as diverse as music, event ticketing, virtual property, gaming, food beverage, and logistics.

You might not be aware of one of the more recent applications, though, and that's in the realm of loans. NFT holders will be pleased to know that their NFTs can now be used as collateral to get loans.

Here, we go down what NFT loans are, how they operate, and how you may get a loan using your NFTs.

NFT loans are a type of financing that...

You can use your NFTs as collateral for a loan if you apply for an NFT loan. This connects the worlds of DeFi with digital assets, including artworks, collectibles, virtual real estate, and other tokenized assets.

Read More: Exploring NFT's Internals

Before the rise in popularity of NFTs, only fungible cryptocurrencies like Bitcoin and ether were utilized as collateral for loans. Some NFTs are so much more valuable than the most popular crypto assets that it only makes sense to utilize them as collateral when applying for loans.

When evaluating an NFT loan, there are a few crucial factors to keep in mind. The loan-to-value (LTV) ratio, liquidation ratio, and NFT floor price are all examples.

The Process of an NFT Loan

NFT loans function in a manner analogous to conventional loan practices. Borrowers who wish to use their NFTs as collateral must first submit a loan request on a lending site that facilitates NFT loans. You can look for platforms that issue NFT loans by using the goods page or by downloading one of several DeFi apps.

You can also find some fantastic starting points by doing a simple Google search. If you're considering receiving an NFT loan, you should shop around for the platform that offers the most favorable rates and terms.

The platform will then evaluate the application using the value of the NFT. Using an NFT with a steady secondary market price history is preferable because it simplifies the valuation phase. The lender will give the loan to the borrower once the appraisal is finished and the NFT value has been verified.

In most cases, the loan is issued in a stablecoin, and the NFT is held in a smart contract until repayment. The loan agreement specifies the loan amount, repayment schedule, and interest rate.

The next step is loan repayment by the borrower to the lender. When this is accomplished, he will receive the NFT back in its unlocked state. If the borrower does not pay back the loan by the due date, the smart contract will liquidate the NFT collateral and transfer it to the lender.

In favor of the NFT loan

Some benefits of NFT loans are outlined below.

frees up capital

You can gain access to cash without selling your NFT if it has a high market value. This is helpful if you need cash quickly but would prefer to keep your NFT in the meantime.

Avoiding Credit Checks

Borrowers with a spotty credit history won't be turned down for an NFT loan because we don't do credit checks. A valuable NFT can serve as collateral in this situation.

Transforming the realm of digital art with DeFi

Lending as an option for NFTs was previously unimaginable. This is now possible in the realm of digital art because of NFT loans.

Read More: The Concept of Non-Fungible Tokens (NFT)

NFT loan disadvantages

The downsides of NFT loans are outlined below as well.

Fluctuations in cost

The high degree of volatility in NFT values makes it challenging to use them as collateral for loans.

Low available cash

Compared to fungible cryptocurrencies like Bitcoin or Ethereum, NFTs are recognized for their lower liquidity. If a borrower defaults, the lender may have a hard time selling the NFT to recoup their losses.

Defective smart contracts

Humans create smart contracts that regulate NFT loans. Therefore, they could be flawed due to the presence of bugs. This might put both the lender and the borrower at risk of financial loss.