Blockchain and cryptocurrency are disrupting the traditional finance sector since their inception. One of the trending topics of the industry is crypto lending. A large number of people including both borrowers and lenders are adopting crypto lending considering its benefits. However, it is considered that cryptocurrency is posing a major threat to central banks, and its different sectors such as lending, around the world. In this article, we will discuss can cryptocurrency take the place of traditional money in the lending segment.
So, let’s get started!
What is crypto lending?
Crypto lending is a process in which investors/ lenders lend out their cryptocurrencies to borrowers to earn interest payments in exchange, but they do not lose their ownership.
Borrowers have to stake their cryptos as collateral to get loans in the fiat currency. After paying off the entire loan amount, they can get back his collateral.
Can cryptocurrency replace money in the lending segment?
To learn about that is it possible for cryptocurrency to take the place of money in the lending segment we will first need to discuss how one sector is superior to the other.
In traditional banks, users have to go through a cumbersome and time-taking process. The same implies when a user applies for a loan. It may take weeks to get a bank loan approval and process. When a borrower fills an application for a bank loan, the bank evaluates the risk by considering various factors such as credit score, property ownership, debt-to-income ratio, etc., to get an idea of whether he will pay them back the loan amount or not. To collect this information, banks check the credit report of the users provided by various agencies such as Experian. Based on the collected information bank price the value of default into the interest payment and the fees on loan.
According to FTC, one-fifth of American have material errors in their credit score that negatively impacts their ability to get a loan from the bank. It means that that 1.7 billion unbanked people cannot even apply for a loan and to get loan users must have a credit score, and it must be good, otherwise, they can’t get a loan.
Banks charge higher interest rates if there are lower chances of loans getting paid back. In this case, banks assign higher interest rates. The interest rate is also higher for the people they consider risky. The higher the credit score will be, the lower the interest rate will be charged. In this way, the higher interest rate makes loans expensive, and fewer people and businesses can afford to borrow.
In the traditional banking sector users also have to face geographical limitations. Only the residents of the country can get a loan from the banks of that country. Also, users can get the loan in the local currency of their country.
Now let’s move towards crypto lending.
Crypto lending on the other hand uses blockchain technology providing various benefits over traditional lending.
P2P lending, DeFi lending and Crypto Lending are the most popular platforms for having passive income. All of them have their benefits and features. Lending crypto is faster, when a borrower applies for a crypto loan, the crypto lending platform takes comparatively less time to approve a loan request. Once a loan is approved, the borrower gets the funds in his account within a few seconds. It is because there is no involvement of any middleman. It is entirely a digitalized process. A lot of time is saved when borrowers do not have to go through various checkpoints.
Crypto lending does not involve a credit check. Borrowers can get a crypto loan even if they have a poor or no credit score at all. It is an excellent opportunity for the unbanked community.
Crypto lending is constrained by geographical barriers. It is more accessible as anyone can get a crypto loan no matter in which country he lives, provided that country is supported by the crypto lending platform. However, lending platforms support a number of different countries.
Crypto lending offers many customizable options. A borrower can decide the duration, currency other than local as well, loan-to-value ratio. He can choose a loan of his requirement as he has many options.
Borrower offers cryptocurrency as collateral instead of any property. Cryptos can be liquidated quickly comparatively.
Borrowers can switch between different assets when lending. They can deposit one type of coin and can get loans in other types of coins such as crypto, stable coin, fiat currency.
According to the discussion up till now, if we compare crypto lending with traditional loans, we find out that crypto lending is more advantageous. Besides many benefits, crypto lending does involve risks such as volatility risk, etc., but its benefits are worth adopting crypto lending. Also, if we consider the increasing demand and adoption of cryptocurrencies globally, we can assume that sooner or later cryptos will take place of money in every or most of the sectors including the lending segment.
Crypto is here to stay so does crypto lending!
Jack is a seasoned software tester with over 10 years of experience in the industry. He takes pleasure in helping others advance in their careers and enjoys spending his free time with family, playing chess, and reading.
As a software tester, Jack ensures the software is error-free and user-friendly by detecting and reporting issues during the development cycle. His articles in Software Tested reflect his knowledge of the critical role software testing plays in the software development process.