Learn more about the most recent addition to the SelfKey Marketplace – the Loans Marketplace! In this article we walk you through our newest addition.
Cryptocurrency Lending vs. Bank Lending
Bank lending and cryptocurrency lending provide essentially the same service, a loan, but do so in very different ways. In this article we walk you through the pros and cons of both forms of lending.
DISCLAIMER: Please be advised that this article is not intended as investment, tax, financial or legal advice. Interested readers should seek out professional advice for their particular situation.
Bank lending has been around for hundreds of years and continues to be the popular choice for most people. Despite the fact that cryptocurrency lending has only been around for a couple of years, the industry is making waves and has been steadily gaining popularity. Traditional bank lending and crypto lending are similar on a superficial level, in that they both allow people to borrow funds, but their differences are what sets them apart.
So how do crypto lending and bank lending compare? In this article, we explore how both forms of lending work, what makes them unique, and their respective pros and cons.
How does bank lending work?
Bank lending is probably the most common form of lending available right now and is used for everything from mortgages to personal loans. If you’ve ever applied for a loan at a traditional bank, then you know it’s a lengthy process. When it comes to bank lending, your credit score matters and will ultimately determine how much money you are able to borrow. If you have a low credit score, you might not be able to get the funds that you require and/or get stuck with a high interest rate.
Additionally, there are several other factors that will be considered, such as your credit history and current income. Once you’ve found a bank that will offer you a loan, you will have to provide a wealth of personal information such as your social security number, proof of employment, bank statements, government-issued ID and more.
Additionally, as a borrower you have little control over what the final loan terms are; the bank will dictate your loan amount and interest rate based on the above information. If you are happy with the loan terms, you’ll need to finalize the loan documents and wait to receive your money, which can take anywhere from a day to a week. Each month, you’ll need to make the minimum repayments as dictated by the loan terms.
How does crypto lending work?
Cryptocurrency lending platforms are incredibly unique, but can mostly be divided into two separate categories:
1. Centralized cryptocurrency lending platforms
Centralized cryptocurrency lending platforms are somewhat similar to traditional bank lending. When a platform is centralized, it typically takes responsibility for onboarding users, checking their KYC, providing a custody solution and managing payments. Centralized crypto lending platforms are usually businesses and take on most of the risk of the lending process. These platforms typically require that a borrower deposits cryptocurrency as collateral for their loan, which is then returned to the borrower once the loan is repaid. In the event that a borrower defaults on their loan, the collateral can be liquidated so that no funds are lost.
From a customer perspective, centralized lending platforms differ meaningfully from decentralized platforms. First of all, centralized platforms typically offer an on and off-ramp with at least one fiat currency. This allows users to deposit or withdraw cash in exchange for crypto. However, the user is ultimately still giving up personal data when using such a platform. KYC information, credit card numbers, and postal addresses are just some of the data points that users have to share.
2. Decentralized cryptocurrency lending platforms
Decentralized platforms are completely unique when compared to centralized platforms and bank lending. Typically, smart contracts are used to automate the distribution of loans and repayments between platform users. Typically, KYC information is not collected and neither is any additional data.
Borrowers simply connect their cryptocurrency wallet, define terms and wait for a lender who agrees to them. This makes decentralized platforms significantly faster and cheaper. That being said, there is usually little-to-no customer support and new crypto community members may be overwhelmed. Additionally, these platforms do not typically provide fiat trading pairs, meaning that only digital assets are available to both borrowers and lenders.
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The pros and cons of bank lending
The main advantage of bank lending is that you are paid out in fiat currency. You don’t have to worry about owning crypto, the rise and fall of crypto prices, and exchanging crypto into fiat currency. You are simply paid out in your local currency, and can then use it however you wish.
The other pro of bank lending is security. When you sign up for a loan, you are highly vetted to make sure that you will be able to repay the funds. The bank also ensures that repayments are done on a secure platform so that you don’t have to worry about your money ending up in the wrong hands.
As for cons, bank lending has a few. First off, since the whole process is tied to your credit score, bank loans aren’t necessarily that accessible for the people who need them. Having a poor or non-existent credit score could result in an incredibly high interest rate, or having your loan application rejected. When you consider that 1.7 billion adults are currently unbanked, meaning that they have no bank account and therefore no credit score, this is a huge issue.
Traditional bank lending is also far slower when compared to cryptocurrency lending. While banks are starting to improve the speed at which you receive your funds, the whole process can take anywhere from a few days to a few weeks. Naturally, this is problematic if you need funds quickly.
Another con is that the terms of your loan are not flexible when you are borrowing from a bank. The bank ultimately determines how much you can borrow, your interest rate, and minimum payment amount. Additionally, banks are not always entirely clear about their fee structure and you may find that your loan actually costs more than you anticipated.
The pros and cons of cryptocurrency lending
Although cryptocurrency lending is new to the field of loans, it has a lot of advantages over traditional bank lending. The first is that getting a crypto loan is far more accessible than getting a bank loan. You don’t need a bank account, you don’t need a credit score, and in some cases you don’t even need to prove your identity.
Another advantage is that you can both borrow and lend on cryptocurrency lending platforms. This allows anyone who owns specified cryptocurrencies to earn interest on their crypto, essentially allowing your crypto to work for you. Banks obviously don’t let you do this.
Cryptocurrency lending also offers more flexible loan terms. Additionally, fees are clearly laid out and are often far lower than those found in traditional banking. On some platforms, there are no minimum monthly repayments; you just need to repay the loan in full at the agreed upon time. You can even find better interest rates on crypto lending platforms; some platforms will offer a lower interest rate if you repay in a specific cryptocurrency.
Despite the fact that many view cryptocurrency as inherently risky, cryptocurrency lending is actually very secure. It is in any crypto lending platform’s best interest to ensure that collateral is protected, and that lenders are repaid in full and on time. Any reputable crypto lending platform will clearly outline their security measures on their website. Securing your cryptocurrency is a priority for these platforms, as a failure to keep your crypto safe is a bad look for any crypto lending platform.
A big criticism that cryptocurrency lending has faced is that the price of cryptocurrency is incredibly volatile. That being said, it’s not an entirely valid concern. On most crypto lending platforms, crypto is only used as collateral. The loan itself is paid out in fiat currency or stablecoins. In the event that the collateral drops or increases in value, borrowers will be prompted to deposit more collateral or have the option to withdraw some crypto.
Conclusion – Cryptocurrency Lending vs. Bank Lending
As you can see, it’s clear that cryptocurrency lending has the upper hand when it comes to loans. The pros far outweigh the cons, and the cons aren’t actually that big of a deal. Even though cryptocurrency lending is a relatively new industry, it is technologically superior to traditional bank lending in many ways. Crypto lending offers more flexibility, more options, and more security than bank lending.
If you’re interested in exploring crypto lending for yourself, you’ll be pleased that we now have a Loans Marketplace in the SelfKey Marketplace! The Loans Marketplace grants SelfKey Wallet users access to the world’s most exciting lending platforms and users are able to easily compare and register for crypto lending services. This is an exciting new Marketplace for the SelfKey community and adds impressive new functionality to the Wallet.
If you’re new to the SelfKey Marketplace, check out this blog post where we walk you through the Loans Marketplace. Download the SelfKey Wallet here and get started on your crypto lending journey today!