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The lending industry has long been burdened with a host of challenges: lengthy application processes, fraud and security risks, and high operational costs, to name but a few. It’s no surprise that lenders and borrowers have been seeking an alternative, more efficient option.
Enter blockchain-based loans, which use blockchain technology to facilitate and record transactions in the lending process, offering increased efficiency, security, transparency, and cost savings. This solution promises to streamline the loan origin, tracking, and management processes while reducing the burden of regulations.
Let’s dive into the current paradigm of bank loans and understand how blockchain-based loans stand to revolutionize loan management for lenders and borrowers alike.
How Do Bank Loans Work Today?
In the existing system, bank loans set an interest rate for the borrower and determine the terms and conditions of the loan using a banking platform. If the borrower accepts the interest rate and signs the terms and conditions, the bank will lend the money. An investor then receives a fixed income at an interest rate lower than the borrower’s.
Here’s an example of how this might work:
After accepting the terms and conditions, the borrower receives the loan from a bank at an interest rate of 10%.
Then, the investor will receive a fixed income from the bank at a rate of 8%.
The bank acting as an intermediary earns the 2% difference as income.
Blockchain-based Loans Offer a Fresh Approach
Blockchain-based loans enable borrowers and investors to connect directly. They can agree on the terms and conditions and the interest rate that works for both parties without an intermediary.
With blockchain-based loans, there is no need for a bank or another third party. This is because the terms and conditions are written into a smart contract. Smart contracts automate the execution of the loan and handle agreements on overdue payments, including the management of collateral assets.
Without having to involve a bank, borrowers get a lower interest rate and investors can get a higher return on the amount invested. In other words, both sides stand to benefit by eliminating the middleman.
What’s more, both parties can trust that all terms and conditions will be securely handled and executed by the smart contract.
Let’s compare it with the previous example:
After accepting and signing the smart contract, the borrower receives the loan at an interest rate of 9%.
The investor will receive an income at a rate of 9%.
There is no intermediary, so the intermediary fee will be 0%.
How Smart Contracts Supercharge Blockchain-based Loans?
While eliminating the middleman makes good financial sense for both the investor and the borrower in blockchain-based loans, smart contracts create even more benefits for both sides:
Higher speed: Transactions only take a few minutes to execute, depending on the blockchain network selected. Bank loans, on the other hand, can take several weeks to be disbursed.
No intermediaries: Smart contracts allow lenders and borrowers to agree on a contract directly. They offer higher returns for lenders and lower interest rates for borrowers.
Programmability of processes: Smart contracts are easy to program, customize, and automate, eliminating the need for constant monitoring.
Market transparency: Any user can check the terms and specifications of smart contracts and understand how they work.
Greater traceability: With the loan executed on a blockchain network, both parties can track all related processes and data.
Immutability: Users cannot change the data entered. This ensures reliable data coordination, increases security, and enables quality auditing.
Security: Blockchain-based lending offers security as users do not store their funds nor the collateral assets on any platform or escrow, and all transactions are executed by smart contracts. In the case of non-payment, the smart contract will use the collateral assets to pay the lender. In the event of the loan ending, the collateral assets will be sent back to the borrower
For an even deeper dive into smart contracts for FinTech products, check out our recent webinar. If you are interested in blockchains, then be sure to read more about blockchain trends.
Blockchain-based loans mark a new era for the lending industry. With the help of an experienced technology partner, FinTechs can leverage this technology to offer a more efficient, secure, and cost-friendly lending solution to their customers.
Interested in learning more about how intive can help you integrate innovative technologies into your FinTech product? Get in touch today.