Have you ever experienced difficulties in getting bank loans? Unlike traditional bank loans, crypto-backed loans offer a much easier barrier to entry. However, they do come with certain risks due to the low barrier to entry.
Many might wonder why take the risk of a crypto-backed loan when they can take a traditional bank loan instead.
In this article, I will be sharing the differences between traditional bank loans and crypto-backed loans.
Traditional Bank Loans
In traditional bank loans, the types of assets that the bank accepts as collateral include property, vehicles, and savings and investment accounts.
All these assets need time to be appraised, and the eligibility of your loan will also be assessed based on different factors such as credit score, interest rates, loan terms, and your income.
With these criteria in place, it can be tough for customers with low credit scores and low income to get access to bank loans.
The whole bank loan process also takes a lot of time as many layers need to be passed before a bank can issue the loans.
These checks are necessary as the bank needs to protect its interests and ensure that the person taking the loan will be able to repay the money.
Crypto Bank Loans
For crypto-backed loans, the loan platforms usually use algorithms and real-time monitoring to manage risks associated with price volatility, adjusting LTV ratios dynamically to protect both the lender and the borrower.
The assets used for collateral are usually larger market-cap coins such as Bitcoin and Ethereum. However, as crypto assets are usually volatile, the amount of collateral needed would be much larger for a smaller loan amount.
For example, to get a $100 crypto-backed loan, you might need $150 worth of crypto collateral before the system would allow you to get a $100 loan from the platform.
With this system and algorithms in place, it makes loans more accessible to a global audience, including those in regions with underdeveloped banking infrastructure, allowing for broader financial inclusion.
In addition, people with low income or little to no collateral will also be able to take on loans much faster, as the checks in a crypto-backed loan are much quicker compared to traditional bank loans.
However, there can be many scams and volatility in these loans due to crypto’s price volatility, which makes it a high-risk loan.
There are measures in place to help mitigate this high volatility. If you would like to know more, you can find more information on the Treehaus finance blog here!
Conclusion
In conclusion, traditional bank loans are a safer option for those who are looking for low-risk and stable rates. However, they come with certain limitations such as a long approval process, limited loan amounts, and loans based on your credit scores.
With crypto-backed loans, it is a higher-risk loan due to the volatility of crypto assets. However, the loan approval process is much faster and the loan amount will not be based on your past credit score, only on the current assets you have in the account.
You should know your risk appetite before choosing a financial instrument for your loan and understand what you need the loan for and the period you will be taking it.
Take a look at some of the personal finance articles on my site to know more about your risk appetite & personal finance!
I hope this article helps you understand the difference between the two types of loans and how they can be beneficial for you!
