Sourcing funds for any project such as to start a new business or expand an existing one is one of the toughest jobs for any entrepreneurial mind. But decentralized Finance have come up with better products that are designed to ease the stress involved in borrowing money. For anyone that has ever gotten loans from our traditional finance institutions, the hurdles to cross are many and difficult.
In this presentation, I will like to analyze the reasons to choose Defi lending products over those of the traditional institutions like banks. First of all, let me quickly look at the many bottlenecks associated with traditional loan programs.
The problem with getting a loan
Consider the following three problems that could hinder anyone from obtaining a loan from traditional institutions.
1. Unattainable collaterals: Whether the lending institution is private or sponsored by a government, the first thing on their mind is how to recover their money in case you failed to repay. That gave raise to this for loan recovery called collateral. So a borrower is usually asked to provide a collateral so that if they failed to pay up, the collateral would be disposed and the funds used to service the loan. I do not have problem with collaterals. But I have problem with what I call unattainable collaterals.
Many lending institutions are outrightly greedy. They ask for collaterals that will not just have the same value as the loan, but exceed it significantly. Its all too common for a borrower to be asked for a collateral which is 4 times or more than the value of the loan. Most times, borrowers do not own such assets, otherwise, why come for a loan. Many business owners are thus unable to asses loans because they are not able to provide collaterals that met the lenders valuation.
2. Credit history: Another thing that lenders quickly check is how credit-worthy a borrower is. Many traditional finance institutions retain an integrated credit database that could be publicly queried to ascertain the credit status of a borrower. If the credit history of a borrower is not consistent or their are some red flags here and there, the borrower may be denied access to a loan. This might even prevent them from accessing loans from any lenders.
While keeping a record of the credit history of customers is great, judging the credit-worthiness of potential borrowers based on their past has always been a roadblock to obtaining loans.
3. Income and employment history: Lenders often ask questions and try to understand the income status and job history of borrowers. This gives them some insight into the repayment potential of any borrowers. Again here, the history in these cases might be a problem. Consider the following examples.
A fresh university graduate who has a wonderful business idea will never get a loan from any lenders because their income history will show that they have never had a job or income. As such, he will be considered huge risk for a loan. He will likely struggle to obtain any loan anywhere. Someone that has been fired from their job because a company is cutting down on cost will have a bad history although its not his fault. But then, it will show up that has been laid off from their former job and so lenders might want to avoid giving him a loan.
The above two examples show that genuinely credit-worthy individuals could be denied a loan on the basis of their income status or job history although such assessments would be misleading.
The three factors above are usually prominent in traditional loan systems. Any or all of them could stop a borrower from obtaining loans anywhere. This makes it imperative to have a better loan systems that raises above such challenges and defi lending is the answer.
Defi lending is the solution
Defi is the next revolution in finance. It is creating products and solutions that are so superior to traditional systems. One of the areas that Defi has excelled is in lending business. Consider how Defi loans are much better than traditional loans of our time.
Crypto collaterals: Defi do require collaterals but they are attainable. Almost all defi lending platforms require collateral but it is something that is attainable. The crypto collaterals require that you lock up some crypto for the period of the loans.
Defi loans are designed to be automated. Anyone could access the loans so long as they are able to provide the collateral. Most times, the collateral is reasonably equal or a little bit above in value to the requested loan. A smart contract containing the loan details is activated once the collateral is provided. If the borrower repays the loan, the collateral is automatically released.Access to loans: Defi crypto loans are open to everyone. They are do not check the credit record, income status or job history of the applicant. These factors are not considered at all when evaluating whether to release the loan of not. Defi loans are not restricted by location as it is hosted on on decentralized network. They are global in nature. Once a user meets the conditions required in the smart contract, they will obtain the loan.
Decentralization: Defi loans are hosted on a blockchain network. Blockchain technology is a distributed ledger that runs on nodes hosted on various computers around the world. Because of the distributed nature of blockchains, it is not censored or controlled by any individuals. This makes the loan processing automatic and transparent. Defi loans are written in a smart contract, and not controlled by any individuals or company boards. As such, a loan on a distributed network is easier to get than loans where companies make hard rules.
Interest: Crypto loans have very low interests. Compared to traditional loans and their high interest, crypto loans are very reasonable in their interest. It is easy to understand because crypto loans require very little finance to set up. A smart contract is a reusable code hosted online. No business structures to rent or maintains and there is no rents to pay. There are no salaries to pay staff. These are all expenses that make traditional loan interest very high. As a result, those that take the loans really struggle to pay them off.
Finally
You can see that the advantages of Defi loans are many. They are easier to get and the entire loan process is very transparent. Borrowers do not need to worry about their credit history, income level or job history. The collateral is easy to meet up. As such, anyone wishing to get a loan for anything should always consider DEFI loans ahead of other options.