The Differences Between Bank Lending and Crypto Lending

Defi
June 18, 2021

Bank lending is a well-known and established lending method that’s been around for a long time. It’s popular among lenders and has spurred the growth of many businesses worldwide. In practice, banks act as a provider of loans, and borrowers request funds from banks for various purposes at a set term. There are many types of loans offered, such as secured loans. The borrower pledges some asset as collateral or unsecured loans, a monetary loan that is not secured against the borrower’s assets. Though bank lending has its fair share of criticism, banks’ lending supports many businesses, especially those in the developing world.

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Crypto lending is an emerging trend within the cryptocurrency world. It’s a new phenomenon in the lending space. It relies on the changing demand and technological advances in the blockchain sphere. In a nutshell, crypto lending is the act of lending digital assets through crypto exchanges or various lending sites. Typically, an interest will incur at an agreed rate for the lending to happen. Although structurally different, there are similarities between bank lending and crypto lending. They both allow individuals and businesses to borrow funds.

The advantages of bank lending

One of the main reasons bank lending has been around for so long is security. Borrowers don’t need to worry about the source of funds they’re borrowing from as banks are a legal institution and often backed by the government. Banks also have an effective system in place to make sure borrowers can repay the loan they borrow. Besides, banks make sure their loan repayment platforms and mechanisms are secure.

When you get a loan from the bank, you receive it in fiat currency. This is proven to be an advantage because you don’t have to deal with the price volatility you would with cryptocurrencies. Although cryptocurrency is rising in popularity, most people still transact with fiat currency daily. It would seem the more logical thing to borrow from banks instead of crypto lending platforms. You also don’t have to worry about exchanging crypto to fiat currency. You can simply receive the loan in your local currency.

With bank lending, you can get a sizeable amount of loans for different purposes. For example, you can take out a loan to purchase a home or a yacht–which costs a lot and often bought with bank loans. On the other hand, crypto lending is relatively new, and it’s uncommon to issue a loan on such a big scale.

The advantages of crypto lending

Suppose you’ve tried applying for a bank loan. In that case, you probably can attest that it’s a lengthy process that often very frustrating to deal with. You need to prove your credibility with a credit score (which will determine if you’re eligible for a loan and how much). A good credit score takes time to acquire. If you have a low credit score or no credit history, you will most likely be unable to get a loan from banks.

bank lending vs crypto lending - hodlnaut blog

That’s where crypto lending comes in; most of them don’t require credit scores or a bank account, this will come in handy for the whopping 1.7 billion unbanked people in the world. Borrowers also have better access to custom terms, unlike the traditional banks where the bank sets the interest rate, amount, and loan period. Crypto loans are more accessible than bank loans, and you can tailor them specifically based on your needs and terms.

Crypto lending is also more beneficial for lenders because the collateral is more liquid than most collaterals in bank lending. It is common for crypto lending platforms to require borrowers to collateralize over 100% of the amount they want to borrow, even more in some cases. This is also a reflection of the crypto asset volatility, hence the high loan ratio. The lenders can typically liquidate the collateral faster when there’s a downward trend in the crypto prices, which will help them reduce losses caused by the drop in prices of the collateralized assets.

There’s no physical paperwork or lengthy loan processing time with crypto lending. Everything is done digitally and can be done in minutes to a few hours. The speedy processing time and hassle-free experience make it one of the most appealing factors of crypto lending. Since there are many different cryptocurrencies, many crypto lending platforms also allow borrowers to switch between assets. In both decentralized and centralized lending platforms, a borrower can deposit one coin and borrow another different one on the same platform. The transaction can be processed within seconds.

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