A couple of years ago, loans were something usually associated with the fiat currencies. Fast forward to our days, you can get loans in Bitcoin. Of course, like everything else that surrounds cryptocurrencies, getting a loan in Bitcoin can be a highly profitable affair, but also a very risky one.
To help you determine if a BTC loan is feasible for you, we have created a general guide which will cover all the basics from how does a BTC loan work, what documents you will need, what are its advantages and disadvantages, as well as if it’s safe or not to get a loan in Bitcoin.
How Bitcoin loans differ from other peer-to-peer loans?
In principle, Bitcoin loans are similar to any standard peer-to-peer loan. Bitcoin loans are basically borrowed digital money which you have to pay back plus interest and fees over a predetermined period.
However, there a few similarities that are worth mentioning. Because Bitcoin is a cryptocurrency that operates entirely only and it’s decentralized, it isn’t affiliated with any central government or banking/financial entity/instruction. Hence, your typical Bitcoin loans will most definitely be from other Bitcoin users.
Another big difference is the fact the Bitcoin lenders don’t rely on the same methods of verifying your creditworthiness (example: credit score or debt-to-income ratio).
How does borrowing a loan in Bitcoin work?
The most accessible way to get Bitcoin loans is through a peer-to-peer platform that connects investors with borrowers. These types of online services require various fees. As one can imagine, you’ll need to create an account and go through various verification processes.
Once the account is verified, you typically need to choose the loan type the best suits your needs and submit your application form. Depending on how many loaners are currently available, you should be contacted with various offers in a matter of hours or maybe days.
These types of platforms usually rely on a so-called trust score, credit score, credit rating, or trust factor (named differently for each platform, even though the principle is the same). This credit score is based on a variety of factors, but to get a good score, you might need to submit extensive documentation.
What documents will you need?
As mentioned before, since service that loan Bitcoin don’t operate on the same principles as traditional fiat lenders, you might be required to submit various personal details and documents.
These documents have to prove your identity (name, gender, age), your full contact information, employment details (recent pay stubs, the name of your employer, or the name of your business), and various other residence details (with associated proofs for bills).
To be more precise, you will need to provide somewhere along the lines of the following list: a government-issued ID, verification of your address, verification of your email, credit card verification, connection to your social media, connect to online payment accounts, and income verification.
Of course, these might differ from service to service. There’s one more important aspect to note, and that is the fact that most services of this type have some basic eligibility requirements. Some platforms even check your online business credentials, your PayPal accounts, and social media connections to determine your borrower rank.
As a general rule, to join a platform for Bitcoin loaning, you generally have to live in a country where Bitcoin is regulated (or at least not officially illegal), have a steady job, and, have a high trust score.
Advantages and disadvantages
The main advantage of Bitcoin loaning is the fact that the whole process is less involved than going to a bank for a typical fiat loan. In addition, interest rates are often lower, and funding is a lot faster than traditional methods.
As mentioned at the start of this article, Bitcoin loans don’t come without a series of drawbacks. For starters, Bitcoin is only regulated in a few countries. Hence, if something goes wrong, no one can really be held accountable.
It’s a known fact that cryptocurrencies (Bitcoin included) are highly volatile assets. By converting your Bitcoin loan in a bad time, you could be losing a lot. These types of loans also call with much higher associated rates and fees than any typical bank loan.
Is it worth investing in Bitcoin lending?
Bitcoin lending is a very personal and complex matter. Bitcoin investing, in general, is a very high-risk, potentially high-return process. A thing to keep in mind is that these types of peer-to-peer lending services usually charge a fee on your returns (usually between 1% and 10%, possibly higher).
The lack of recourse and the high default rates are the aspects you should consider carefully before investing in Bitcoin lending.
Before you decide to commit to Bitcoin lending, you should ask yourself a series of questions. Do I really need to borrow capital in Bitcoin, or does another crypto work better for my needs? Am I willing to outweigh the cost and potential risks for the possible benefits?
You should carefully compare the offers from both Bitcoin lender services and traditional fiat lenders. At the end of the day, you have to keep in mind that cryptocurrencies are a new concept and lots of things can go wrong. The same goes for Bitcoin lending, an even newer concept which is not regulated.
Currently, it seems that Bitcoin loans are most viable for people who don’t meet the standard credit requirements usually associated with banks.