As for all that surrounds bitcoin, getting a loan with this cryptocurrency is different from financing a loan in US dollars. Interest rates are often lower, your credit score does not matter, and funding comes from individuals and not institutions. But it is also much riskier and investors are often attracted to new businesses – people looking to invest in another cryptocurrency but do not have the money or those who need funds to start a transaction. cryptocurrency extraction.
In other words, it’s usually not for noobs.
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The most common place to get a bitcoin loan is an online service that matches lenders and borrowers. Here are two of the leading providers of Bitcoin loan platforms.
You can get a bitcoin loan without going through a platform by visiting online forums and contacting individual dealers directly. You may not have to pay a platform fee, but these risks are much higher for both the borrower and the lender.
Indeed, it is even more difficult to verify the identity of a person on a forum. And if something goes wrong, you might not have legal recourse to get your money back.
It is better to leave the forums to experienced Bitcoin users who have a clear idea of how to detect a scam.
To understand how bitcoin loans work, you need to understand what bitcoin is. Bitcoin is basically a cryptocurrency that works entirely online. It is decentralized, that is, no organization, no individual, no particular country controls it. This allows bitcoin users to make direct transactions with each other without the involvement of a third party – such as a bank.
The transactions are recorded and published on an electronic book called blockchain, accessible to all. The blockchain relies on several anonymous computers – called minors – to verify the legitimacy of transactions before joining the blockchain to prevent fraud. Rather than the existing blockchain on a server, making it vulnerable to hackers, it is distributed to all bitcoin users.
Confused? Read our beginner’s guide on Bitcoin
At the basic level, Bitcoin loans work like your standard term loan: it is the borrowed money you repay, plus interest and fees over a predetermined period of time. You repay it in fixed installments according to your loan agreement. You can also obtain bitcoin credit lines and short-term bitcoin loans.
This is where most of the similarities end. Since Bitcoin is not affiliated with any central government or banking institution, your typical Bitcoin loan comes from other Bitcoin users. You will also need to take into account any commission on the current exchange rate in your fees.
The easiest way to get a bitcoin loan is to use a peer-to-peer platform that connects investors with borrowers, usually for a fee. To borrow via a Bitcoin loan platform, you must first set up an account and wait for verification.
Bitcoin lenders do not rely on the usual methods to judge your creditworthiness, such as your credit score or debt ratio. Instead, the platforms give you a confidence score, sometimes called a credit score or rating, based on their ability to verify your identity and financial history. To obtain a high confidence score, you may need to submit detailed documentation.
Once your account is verified, you usually need to select your loan type and submit your application form. You can receive loan offers in just a few hours and get your funds instantly once you have agreed.
Because you will not go through a traditional lender, some of the documents you will need to provide to get a loan in bitcoins will be different from those of a standard loan.
Getting a loan in bitcoins could be less complicated than going to a bank. But you still face basic eligibility criteria. To join a Bitcoin platform and find investors willing to lend at a competitive rate, you usually need to:
Although bitcoin loan platforms sound similar to other peer-to-peer online lenders, such as LendingClub or Prosper, you will find the main differences:
Firstly, Bitcoin platforms determine your creditworthiness by using criteria different from those of peer-to-peer platforms that make loans in euros. Bitcoin platforms tend to focus on your online presence and often do not care about your credit history or what you owe elsewhere.
On the other hand, peer-to-peer platforms do not care who you are, but put a lot of weight on your credit score and other aspects of your financial history.
In addition, bitcoin loans are less regulated than loans in euros. There is virtually no underwriting compared to peer lenders. In addition, lenders sometimes have no recourse to be compensated if the borrower lives in another country and is defaulted. And Bitcoin loans tend to default at a much higher rate, making them riskier from the investment point of view.
Investment in Bitcoins is a high risk and potentially profitable game. It’s easy to start if you already have a peer-to-peer account.
Once connected, you can search for funds for borrowers and choose the amount you want to invest. Platforms usually charge a fee on your returns – usually between 1% and 10%, though they may go higher.
The high default rate, the relative lack of recourse in the event of default by the borrower and the constant value of the currency all represent significant risks for an investor. Remember to buy insurance on your investments to try to reduce these risks and make sure you take into account the recipients of the loans.
Given its relative lack of regulation, bitcoin is not always as stable as the good old American euro. If you prefer to get a more traditional loan with similar features and requirements, you may want to try:
Bitcoin loans are new and not well regulated. But they could be another viable form of financing for those who do not meet standard credit requirements. Interest rates are often lower and financing can be almost instantaneous. Nevertheless, even if you do not have stellar credit, understand how crypto-currencies work. As the blockchain gets longer, the extra energy needed to build a block could lead to more expensive loans.
Before you start borrowing in bitcoins, discover other cryptocurrency loan options before deciding which one best fits your needs. You can also consider other personal loan options for traditional financing.