Crypto-backed loans are becoming more and more popular, as they represent an excellent alternative to traditional loans. This is primarily because of the blockchain technology used for securing the loans, as it increases transparency and trust.
What are crypto-backed loans?
Crypto-backed loans are loans backed by cryptocurrency assets. To get a loan, you simply need to provide cryptocurrency as collateral. No extensive documentation, verification, and credit checks – absolutely hassle-free.
These loans are provided to borrowers via decentralized blockchain platforms, where smart contracts are created once all the parties come to a mutual agreement. The process is straightforward and transparent, and there are no hidden fees. When a borrower repays their loan, they get their crypto assets back.
Since crypto assets fluctuate, lenders are protected by margin calls, meaning that borrowers must increase their collateral if its value drops sharply.
Crypto-backed lending has not truly taken the industry by storm yet
This is partly because a lot of people still don’t quite realize the huge potential of crypto-backed loans and all the ways in which they are better than traditional loans. The other reason is that there are still many restrictions and legal issues regarding these loans.
That’s because there are scam companies that take advantage of P2P lending and its decentralized nature. For instance, according to a report on TechNode, about a third of 3448 P2P lending platforms operating in China in 2015 included schemes, which led to police investigations and the users not being able to withdraw their funds.
When people borrow from such unreliable companies, they don’t have any recourse for getting their payments, as scam companies are usually not regulated.
Benefits of crypto-backed loans
Why are crypto-backed loans better than traditional loans? Because they are fast (almost instantly issued), they don’t include credit checks, nor any other kind of verification, and they’re safe. The crypto assets that secure them are safely kept in cold wallets until the borrowers repay the loans.
The interest rates are very low, and the holders don’t need to sell their crypto assets. That way, not only are they exempt from income taxes, but they could also make a profit if the value of their assets rises.
Where do people spend the money?
People get crypto-backed loans for a number of reasons, but the most popular seem to be purchasing a home, paying off credit card debt or student loans, funding a startup or other business initiatives, and paying off travel expenses, usually concerning vacations.
As you can see, crypto-backed loans are very cost-effective alternatives to traditional loans and have pretty great benefits for both lenders and borrowers. They haven’t gone mainstream yet, but they definitely look promising.
HODL Finance is the European digital lending company. HODL Finance issues loans backed by cryptocurrency and other digital assets. Founded by the shareholders of the peer-to-peer lending platform, Savy, HODL Finance now serves clients around the world.