If you’re one of the few unfortunate risk-averse individuals who thought Cryptocurrencies were a passing fad, chances are, you are now kicking yourself after getting wind of the bull run. Worse still, the ongoing global pandemic may have put you in a financial pickle, and all you can do is to try and stretch every penny flying your way. Or still, you may have just landed a new gig, and the before-I-get-paid period is pushing you to the edges of a financial Siberia.
Irrespective of how your financial crunch happened, you need money. And quickly so.
A few years back, you had two options; hit up family or friends to lend you cash or reach out to your local bank branch for a loan. With the explosion of cryptocurrency, however, you now have another option. Visiting one of the many websites to borrow crypto and applying for a loan.
But just like any other form of borrowing crypto borrowing has its own merits and a fair share of demerits.
In this article, we are going to break down the pros and cons of crypto borrowing. Keep reading to find out about all that.
Benefits of Crypto Borrowing
Borrowing in mainstream banks entails dressing up in a suit, telling the bank why you need a loan, and leaving the rest to Lady Luck as the underwriting process unfolds. With crypto borrowing, however, you can enjoy several major benefits including;
Your Credit Score Is Irrelevant
Applying for a loan in traditional banks is a lengthy and time-consuming process. Still, you need to overcome the bureaucratic process of proving your credit history, credit score, and income, all of which determine how much money you can borrow. If you’re fortunate enough to have a good FICO score, this shouldn’t worry you. If you’re caught in a bind and need a loan, however, a weak credit score can significantly diminish your chances of getting the much-needed source of funding.
And if you’re fortunate enough to find a bank that can accommodate your weak credit score, you’re required to provide a wealth of personal information including proof of employment, a social security number, government-issued ID, bank statements, and more. Still, you’ll have little control over the terms and conditions of the loan, as they’re dictated by the bank.
But what if you are among the 1.7 billion adults in the world who are unbanked? Your chances of getting a traditional loan are next to impossible.
Cryptocurrency lending eliminates these two constraints in one stone. Your credits score doesn’t matter as long as you have the crypto assets, plus you don’t need a bank account. As such, Crypto loans give people an opportunity to access funds, even individuals that traditional banks would never consider.
Erases Geographical Barriers
The people who created the internet probably never intended it to be a platform for people to lend and borrow using crypto irrespective of their location. Nevertheless, the efficacy of the internet in shrinking our world is a major benefit.
Back then, you had to find commercial banks and credit unions within your neighborhood to apply for a loan. The only way you could have extended your search into the outskirts of your local neighborhood was only if you had a car.
With crypto borrowing, however, you can sign up for several lending platforms, all without leaving your couch. What’s more, you get to borrow loans from crypto holders around the world, meaning you can get better interest rates. Put simply, crypto loans allow you to expand your borrowing horizons.
Faster Turnaround Time
Traditional bank loans can take anywhere from a few business days to several weeks to get approved and processed. And although some banks are beginning to offer same-day loans, it is often pegged on multiple factors such as your financial position and credit score. If you need a loan ASAP, this may present some problems.
When it comes to cryptocurrency borrowing, most platforms approve loans within 24 hours, allowing you to access the funding at the most pressing moment. And although you may be required to undergo a KYC process and ID verification, you don’t have to provide a stack of documents to prove your eligibility. As long as you have crypto assets to deposit as collateral and a valid government-issued ID, everything else takes a back seat, making the process much faster.
Needless to say, some crypto loans may take longer in peer-to-peer (P2P) networks, as they require cooperation between lenders and borrowers. If you want an instant crypto loan, look for a platform that doesn’t rely on a P2P network.
If you’ve ever borrowed a payday loan, you know they come with notorious, sky-high interest rates. Personal loans, on the other hand, have unreasonably rigid repayment schedules and stringent conditions.
If you have a regular income source, this may not necessarily be bad. However, it can have a huge impact on your finances, especially if you still have problems paying your bills.
Although crypto lenders charge a fee, they’re usually less than the price of interest. Along with that, the anonymous nature of crypto means you can skip the vetting and underwriting process conducted by the mainstream banks and get your money as soon as possible.
The security guards and bulletproof window panes give most people the illusion that nothing would ever happen to their money in a traditional bank. However, nearly all major money laundering scandals in the world have involved banks in one way or another. Still, banks are operated by human beings, who by nature, are fallible. Still, traditional banks fall short of glory in terms of security measures, especially in matters of technology.
At face value, Cryptocurrency borrowing seems like a risky venture, mainly because it is a digital currency. Nevertheless, crypto lending platforms are by far more secure than the mainstream banks, because they have to be. Industry players have been actively working to gain the much-needed reputation, especially in the area of safety. And to become mainstream, users need to understand that cryptocurrencies are safe, if not much safer, than the traditional banks.
As a borrower, it is important to check whether the platform you’re using clearly outlines the security protocols on their website and how they protect your collateral. Typically, 95% or even more of your funds are stored in cold wallets, meaning that your collateral is securely stored offline, making it virtually impossible to hack.
Reputable platforms also outline the security measures they’ve put in place to prevent DDoS attacks, with others going further by insuring all the digital assets within their platform.
Cons of Crypto Borrowing
Now that we’ve seen the merits of crypto borrowing, what’s the catch?. Below are some of the downsides you may encounter.
Price Volatility of Cryptocurrencies
We can all unanimously agree that the prices of cryptocurrencies tend to fluctuate with all the subtlety of playing on a trampoline.
As a borrower, the price volatility could be beneficial if the price drops. However, if your repayment period comes up in a bullish run, the spike could leave a serious dent in your wallet.
To a certain extent, personal finance success boils down to certainty in the interest rates. If our crypto loan of $500 costs you $100 today and $150 next week, budgeting can become a major issue, unless you’re repaying using crypto. To avoid this volatility, however, you can invest in stable coins, which are cryptocurrencies designed to retain their value just like real-world assets.
In their infant stages, cryptocurrencies faced many teething problems, with one of the major ones being the theft of coins. Bitcoin, for example, was always making headlines for the major heists that online hackers and scammers were routinely pulling off. A good example is the 2014 Mt. Gox hacking, which saw over 850,000 bitcoins coins belonging to customers disappearing.
On a more practical note, if you happen to lose your wallet or get your keys stolen, you could lose the borrowed coins forever. And today’s bitcoin price is anything to go by, we all know how nasty of a feeling that could be.
Compare this to a scenario where your bank branch gets robbed, you rest assured of getting compensated if your money was stolen. In the crypto ecosystem, however, such resources are non-existent.
Although cryptocurrency lending is a relatively new financial product to the loans market, it’s undoubtedly gaining popularity with every passing day. As of January 2020, crypto borrowing has seen a spike in popularity, and this momentum isn’t slowing down anytime soon. The easy accessibility of crypto loans gives financial freedom to many, and the security offered by the underlying blockchain technology eliminates some security issues that have been plaguing the mainstream financial industry. Be as it may, however, crypto borrowing does have some major challenges including price volatility and security threats, but as the industry becomes more mainstream these issues will continue to be ironed out.