Did you know you can borrow bitcoin? You can also take out a loan against any bitcoin you may have. Both of these opportunities are now possible. In fact, in some ways, the option to get a bitcoin loan is actually better and more cost-effective than getting a traditional loan.
If that’s really the case, then how do bitcoin loans work?
Let’s take a look.
The answer is simple: to save on time and fees.
It’s no secret that Bitcoin and cryptocurrencies, in general, are disrupting the financial sector.
Take, for example, Christine Lagarde, a 63-year-old French lawyer, politician, and economist. She used to be the Managing Director and Chairwoman of the International Monetary Fund. Now she’s become the President of the European Central Bank (ECB). And recently, Lagarde went on record with CNBC to say:
“I think the role of the disruptors and anything that is using distributed ledger technology, whether you call it crypto, assets, currencies, or whatever … that is clearly shaking the system.”
One of the ways crypto is shaking the financial system is through a new application of blockchain technology. This new application is called:
DeFi, for short, is a financial system that applies the benefits of decentralization to financial tools.
The most prominent case for DeFi is bitcoin loans.
Up until DeFi, if you needed a loan for a car, laptop, or anything else…you went to your brick-and-mortar traditional bank and applied for a well established, secure method of paying your expenses: a traditional loan.
Traditional loans require the following steps:
- Submitting your ID and other forms of verification
- Getting your credit score checked
- Signing loan documents
- Giving collateral if necessary
- Waiting to get the loan deposited in your account
- Repaying the loan with high interest
- Making sure you pay on time so nothing tarnishes your credit score
Bitcoin loans are different in the following ways:
- 100% need collateral
- Lower APR from 4% to 12% instead of 12% to 24% or more on traditional loans
- Process instantly and get funds fast instead of waiting
- No credit score checks
The bottom line is that crypto-backed loans help you speed up the process while avoiding high APR and credit checks associated with all types of traditional loans.
So now that we’ve examined a few reasons to get a bitcoin loan, let’s dive into the logistics of it.
Bitcoin loans are most similar to car loans or refinance loans on a mortgage.
When you get a car loan, the bank keeps the title to your car as collateral. When you get a refinance loan, the bank keeps the legal title to your home (in exchange for a cash loan). When you repay your loan plus any interest then you get the title to your car or home.
Bitcoin loans work in a very similar way.
- You find a DeFi site you trust.
- Pick the loan terms that suit you best.
- You deposit your bitcoin or other cryptocurrency as collateral.
- Repay the loan and, in the end, get your collateral back.
Depending on the DeFi site you use, you can get a loan in:
- Bitcoin deposited to any address you choose.
- USDT or other stablecoin deposited to an address you choose.
- USD or EURO or other fiat options deposited to a bank of your choice.
Many DeFi sites don’t even ask for your credit score. Some don’t even ask for KYC.
All this is thanks to smart contracts running on blockchain technology.
The smart contracts automatically verify your collateral and disburse the loan to you. The smart contracts also record when you pay your interest and loan payments and, when it’s all complete, they automatically release your collateral back to you.
It’s a simple process that is gaining popularity because of how easy and secure it can be.
Now that you’ve seen the why and how, the only question is: should you get a bitcoin loan?
If you have a medium or low credit score then the answer leans heavily toward yes. That’s because you won’t need to submit a credit check or risk high APR costs.
Even if you have a high credit score, you can consider a bitcoin loan. That’s because the process is faster and the fees still tend to be lower.
Also, did you know that if you already hold Bitcoin or other cryptocurrencies then you can earn interest from them?
That’s right. Bitcoin loans aren’t just for people who need to borrow funds.
You can earn interest by depositing your bags of bitcoin or other cryptocurrencies with the DeFi platform of your choice. The smart contract will record the deposit and pay you interest on your deposit.
So, if you’re debating the pros and cons of buying stocks during the COVID Pandemic, also consider that you can buy crypto, deposit it with a DeFi platform, and earn a healthy amount of interest that way too.
If all of these factors intrigue you, then dig deeper and start by reading The Ultimate Guide and 5 Best Sites in 2020 for DeFi loans.
After that, you’ll know exactly how bitcoin loans work, which DeFi platforms are the best for you, and how to survive and thrive this year and beyond, whether you need a loan to get through these difficult times or you’d like to make a little cash.