Cryptocurrency, a major breakthrough in the FinTech world, is a digital currency generated by encryption technique known as cryptography. The currency has come the long way, however, still facing brickbats from the representatives of various nations.
The revolution is in full swing with companies, which are reliant on the new technology for smooth financial operations. The use of this currency has increased to the limit that entrepreneurs back their personal loans with crypto.k
Crypto-backed loans can be seen as the future of the lending industry as it eradicates all potential problems, for instance, lack of transparency, hidden surprises, inefficiency, and unethical practices, of the current lending system.
When you apply for a short term loan, you have to go through a complicated online system that requires you to fill out an online application form and submit it along with a plethora of documents like bank statements to prove your repayment capacity. You also take the risk of having footprints on your credit report due to a credit check into the bargain. Loan companies charge preposterous interest rates and continue to give as many hidden surprises as possible unless you have cleared all your dues.
Even though the entire online procedure is claimed as easy, straightforward and reliable, it seems a daunting process to crypto investors and hence, they have come up with an idea of cryptocurrency loans, also known as crypto-backed loans.
It is not a different type of loan like a personal loan rather any loan collateralized by cryptocurrency is known as a crypto-backed loan read more on financeblogposts.com. The loan is secured through a contract operated on the blockchain protocol. The term of the contract may vary from particular days to months or years, depending on the amount of the loan.
Features of crypto-backed loans
- The document is processed at once on the blockchain after both parties are agreed upon the terms of the contract.
- No credit check, paperwork, and unnecessary application are required to borrow money.
- The rate of interest will be much more affordable than loans processed through banks and online lenders.
How do these loans work?
These loans operate similar to online loans. The lender will remit funds to you when you have given your consent to all terms and conditions of the contract. You will pay back each installment on the due date as and when required. Once you have made all repayments, the collateralized crypto coins will be returned to you and the contract will be declared finished.
The interest rates can be fixed and floating depending on multiple factors such as the tenure of the loan, the size of the loan, and the value of your collateral, market fluctuations, and the like.
Volatility nature can ask you to put additional security
Personal loans do not require you to put an asset against the loan, but you may go for this option to avail of the lower interest rates. Once you have put the security and sealed the deal, your lender will not ask you to put an additional amount to secure the loan throughout the term.
However, the concept of collateral in crypto-backed loans is different. Crypto assets tend to be volatile and therefore, these loans are subject to a margin call. If the value of the crypto asset drops down below a certain level, you will be asked to secure your loan by additional cryptocurrency.
Crypto-backed Loans Vs Traditional Loans
The significant difference between both types of loans is the former is based on the purely collateralized lending concept and the latter is subject to the collateral only under specific circumstances.
|Crypto-backed Loans||Traditional Loans|
|Lower interest rates||Interest rates are low as the security mitigates the risk of lending.||Unsecured loans carry high-interest rates.|
|Credit checks||The primary focus is on the quality of the collateral.||Creditworthiness and loan history is the primary criteria to approve the loan.|
|Loan limit||There is no limit to borrowing, as you will secure it by an equivalent amount of cryptocurrency.||Unsecured loans come with a small amount. You cannot borrow more than £25,000|
|Hidden charges||You do not have to pay for the additional cost.||You are likely to come up with hidden surprises.|