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Like everything else that surrounds bitcoin, getting a loan with this cryptocurrency is different than financing a loan in US dollars. Interest rates are often lower, your credit score doesn’t matter and funding comes from individuals, not institutions. But it’s also much riskier, and investors are often attracted to new business ventures — individuals looking to invest in another cryptocurrency but don’t have the cash or those needing funds to start a cryptocurrency mining operation.
In other words, it’s generally not for noobs.
Here are some of the most popular places to get a cryptocurrency loan.
You can get a loan in bitcoin without going through a platform by visiting online forums and directly dealing with individual dealers. You might not have to pay a platform fee, but it’s much riskier for both the borrower and the lender.
This is because it’s even harder to verify someone’s identification on a forum. And if something goes wrong, you might not have legal recourse to get your money back.
Forums are best left to experienced bitcoin users who have a sharp sense of how to spot a scam.
To understand how bitcoin loans work, you’ll need to understand what bitcoin is. Basically, bitcoin is a cryptocurrency that operates entirely online. It’s decentralized, meaning no particular organization, individual or country controls it. This allows bitcoin users to make direct transactions between one another without a third party — like a bank — getting involved.
Transactions are recorded and published on an electronic ledger called a blockchain, which anyone can access. The blockchain relies on several anonymous computers — called miners — to verify the legitimacy of transactions before they join the blockchain to prevent fraud. Rather than the blockchain existing on one server, leaving it vulnerable to hackers, it’s distributed to all bitcoin users.
On a basic level, bitcoin loans work like your standard term loan: It’s borrowed money that you pay back plus interest and fees over a predetermined period of time. You pay it back in fixed installments depending on your loan agreement. You can also get bitcoin lines of credit and short-term bitcoin loans.
That’s where most of the similarities end. Because bitcoin isn’t affiliated with any central government or banking institution, your typical bitcoin loan will be from other bitcoin users. You’ll also need to factor any commission on the current exchange rate into your fees.
The easiest way to get a bitcoin loan is through a peer-to-peer platform that connects investors with borrowers, usually for a fee. To borrow through a bitcoin loan platform, you first need to set up an account and wait for verification.
Bitcoin lenders don’t rely on the typical ways of judging your creditworthiness, such as your credit score or debt-to-income ratio. Instead, platforms give you a trust score — sometimes called a credit score or rating — based on how much they’re able to verify about your identity and financial history. To get a high trust score, you might need to submit extensive documentation.
Once your account is verified, you typically need to select your loan type and submit your application form. You can receive loan offers in as little as a few hours and get your funds instantly once you accept.
Because you won’t be going through a traditional lender, some of the documentation you’ll need to provide to get a bitcoin loan will be different than with a standard loan.
Getting a bitcoin loan might be less involved than going to a bank. But you still face basic eligibility requirements. To join a bitcoin platform and find investors willing to lend to you at a competitive rate, you generally must:
While bitcoin lending platforms sound similar to other online peer-to-peer lenders, like LendingClub or Prosper, you’ll find key differences:
First, bitcoin platforms determine your creditworthiness using criteria that differs from peer-to-peer platforms that lend in dollars. Bitcoin platforms tend to focus on your online presence, and they often don’t care about your credit history or how much you owe elsewhere.
In contrast, peer-to-peer dollar platforms don’t care much about who you are but put a lot of weight on your credit score and other aspects of your financial history.
Also, bitcoin lending is less regulated than dollar loans. There’s almost no underwriting compared with dollar peer lenders. There’s also sometimes no recourse for lenders to get compensated if the borrower lives in another country and defaults. And bitcoin loans tend to default at a much higher rate, making them riskier from the investment end.
Bitcoin investing is a high-risk, potentially high-return game. It’s easy to start if you already own a peer-to-peer account.
Once you’re logged in, you can shop around for borrowers to fund and choose the amount you’d like to invest. Platforms typically charge a fee on your returns — typically 1% to 10%, though it can go higher.
The high default rate, relative lack of recourse if a borrower defaults and ever yo-yoing value of the currency all pose significant risks to an investor. Consider getting insurance on your investments to try to deflect these risks and make sure you carefully consider who you’re lending to.
Given its relative lack of regulation, bitcoin isn’t always as stable as the good old American dollar. If you’d rather take on a more traditional loan with similar features and requirements, you might want to try:
Bitcoin loans are new and not well regulated. But they could be a viable alternative form of financing for someone who doesn’t meet standard credit requirements. Interest rates are often lower and funding can be nearly instantaneous. Still, even if you don’t have stellar credit, understand how cryptocurrencies operate. As the blockchain gets longer, the extra energy it takes to complete a block could lead to more expensive loans.
Before you dive first into bitcoin borrowing, check out other cryptocurrency loan options before deciding which best fits your needs. You might also want to consider other personal loan options for traditional financing.
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