Importance of Secured Loan Collateral
To start with, let us explain in layman’s terms what “collateral” is. Fundamentally, collateral is an asset(s) or valued item(s) that a borrower pledges as security for loan repayment to a lender. Here, collateral serves as a lender’s protection against a borrower’s unexpected default. The biggest advantage of collateral to the borrower is that the lender is ready to offer lower interest rates and longer loan terms on collaterized loans in comparison to those with no collateral, thus the risk of loss to the lender is reduced to the minimum.
At LendaBit, the borrower is required to provide collateral in the form of cryptocurrencies when applying for a loan and the initial LTV ratio (Principal Loan Amount + Interest/Total Value of Collateral × 100) has to be no less than 50% of the loan amount or, to put it simply, the collateral amount is twice the amount of the lent loan. To make all platform users feel comfortable, a useful and easy-to-understand Calculator is available both to lenders and borrowers, thus the whole process is transparent and automated to the maximum. Simply choose your preferred amount to borrow/lend, loan term, collateral currency (for borrowers) and the rest of calculations (daily rate, interest rate and interest amount) will be executed by Calculator.
How Lenders Benefit From Collaterized Loans
If the borrower unexpectedly defaults on a loan secured by crypto collateral, the lender can seize his crypto collateral to repay the debt, thus the latter protects his funds.
- A crypto-secured loan is the best low risk investment option for the lender because the borrower does not want to lose pledged collateral, so the likelihood of a loan default is very low.
- Besides, all transactions are secure and transparent at the same time due to deployment of blockchain technology.
- To crown it all, lending cryptocurrencies is non-taxable and, as such, the lender saves and multiplies extra income.
- Finally, the demand for crypto loans exceeds the supply.
Advantages to Borrowers
The main problems that borrowers face are low credit scores, never-ending bureaucracy, high interest
rates and many more obstacles in obtaining the desired loans. P2P lending secured by crypto collateral
is a well-balanced decision to the aforementioned issues.
- Firstly, borrowers at LendaBit are not audited for poor credit scores, thus it is a great chance to apply for a collaterized loan and get the necessary funds for provisional needs.
- Secondly, borrowers enjoy lower interest rates for loan repayment, thus making P2P lending accessible and stimulating.
- Thirdly, crypto pledged as collateral prevents from late loan repayments and motivates to avoid any unnecessary controversial issues.
- Fourthly, pledged collateral raises lenders’ willingness to lend more assets at affordable terms and conditions.
- Fifthly, by using P2P lending services, there are no geographical constraints and borrowers get global access to cryptocurrencies.
- Lastly, borrowing crypto is tax-free, highly secured and transparent.
Summarily, this article proves that pledged collateral does really matter in online P2P lending, it helps
eliminate any hidden fees and keeps every platform user honest.
Deniss has been in asset and risk management for more than 20 years in one of the top Latvian banks.
He is highly proficient in finance, investing, blockchain and startup development.
Being CEO at LendaBit.com, he is dedicated to solving company problems using impeccable judgment and critical thinking skills.