The world of cryptocurrency is vast and can often be seen as daunting to newcomers. In order to navigate the waters of cryptocurrency and blockchain technology, investors must first truly understand and seek comprehensive knowledge in the respective fields and learn to stay clear of pitfalls. This is even more relevant with respect to crypto-backed loans, as the space is largely unregulated. This gives rise to the incidence of scam artists who will take every opportunity to con and dupe novices. However, with enough research and due diligence, investors can come out on the other side victorious and transfer their assets to safe havens instead. Here are some important questions investors should ask before deciding on a crypto-backed loan to check for its legitimacy and whether it is the right one for them to consider:
1. Can the loan be modified to suit specific needs?
Loans granted by financial institutions are highly standardized in nature, whereas loans granted by crypto lenders often have the feature of being modified as per the convenience and requirements of the parties to the transaction. Various features of the loan contract such as the LTV ratio (Loan to Value), duration, initial and maintenance margin can be negotiated and agreed upon before the contract is initiated.
2. What are the interest rates being charged?
Traditional lenders tend to charge enormous rates of interest on loans in most countries, especially those that are backed by risky assets. However, crypto-backed lending aims to rid this problem by charging reasonable and equitable rates of interest in order to conduct business in a fair and efficient manner. Hence, it is important to find lenders who conduct themselves in this manner and maintain their clarity and transparency on the rates of interest that they charge.
3. How safe is it to take the loan?
Cryptocurrency operates on the blockchain protocol where transactions are highly encrypted and secure. Questions on the security of transactions do not arise as much as those regarding the credibility of the lender itself. It is important for an investor to conduct thorough research and investigation in regards to the details of the lender. Investors must check for the integrity and quality of the lending platform in order to ascertain whether the organization is reliable for lenders to entrust their cryptocurrency to.
4. How transparent and reliable is the lender?
Large institutions often include hidden fees with clauses in fine print or in complicated legal terms in loan contracts. This aspect has, time and again, proven to be a massive burden to borrowers thereby ruining their faith in the system – as these charges often give rise to financial problems for borrowers. They must thoroughly read the terms and conditions of all contracts involved, and should preferably have a lawyer ratify them before making a decision to obtain the loan.
5. What are the penalties on missing a payment?
Lenders may impose late penalties and fines on borrowers who make late payments or miss payments entirely. While borrowers generally may have legitimate reasons for doing so, it is important for them to not obtain loans from unscrupulous lenders. These lenders may cause them to forfeit their cryptocurrency by liquidating their portfolio to clear off dues. This can prove to be severely detrimental to the financial well being of investors and could cause them to lose parts of or the entirety of their crypto assets.
6. What documents are required?
Since crypto-based lending operates on the blockchain protocol, very few documents are required and no background checks on creditworthiness and loan history take place. However, if there happens to be various terms and proofs required by the lending company, it may be wise to upload all the required forms and complete the formalities immediately.
A large number of companies today are working on crypto-backed lending platforms and are seeking to expand into this viable space. In this light, it is crucial for potential investors to conduct comprehensive background checks and exercise due diligence in order to protect themselves against fraudulent companies whose only aim is to scam investors out of their crypto assets.
You can find out more about Crypto-backed Loans in our Ultimate Guide to Crypto-Backed Loans
Can crypto-backed loans truly disrupt and replace the traditional lending system that is in place today? Will they be able to provide investors with loans backed by all cryptocurrencies? Will investors be able to ascertain, for sure, how reliable their lenders are and flock to these platforms? Please let us know your thoughts and views on the matter in the comments section below.
Finance student who has a keen interest in securities markets and new technologies.