Borrowing In Bitcoin: How Is It Different From Installment Loans?
Taking out a loan in bitcoin comes with benefits, but like any borrowing option, there are potential risks to relying on cryptocurrencies in an emergency. Keep scrolling to find out more about how these products work. Below, you’ll find out how they compare to the installment loan, another option in emergencies.
What Is a Bitcoin Loan?
The basic building blocks of a bitcoin loan are similar to that of any loan. It’s a term financial product. All this means is you have to repay what you borrow (plus interest and fees) within a pre-determined time.
The details of your repayment — along with rates, conditions and the number of bitcoin you receive — vary from lender to lender. In many cases, they mimic existing financial products.
Who Funds This Financial Product?
Bitcoin is a decentralized cryptocurrency, so the world’s biggest banks aren’t issuing funds in the form of bitcoin. Not yet, at any rate. Instead, this kind of financial product comes from people or businesses that own bitcoin.
You can find these bitcoin users on crypto-backed platforms that operate like other peer-to-peer lending apps. Like other P2P options, these platforms make it easier to borrow in some respects:
- No credit check — They could be an option if you have bad credit as long as you have a trustworthy online presence.
- Low interest rates — Since they operate outside the typical financial sphere, they often have fewer surcharges and lower interest fees.
- Large borrowing amounts — These are best used for large personal investments or business needs.
Unfortunately, due to the volatile nature of bitcoin, this option isn’t without its drawbacks:
- Volatility — Fluctuations in price can make it a bad idea if you’re borrowing in the short-term, as the cryptocurrency may rise or fall 10% in one day.
- Regulation — There are reasons why people choose to borrow through trusted financial institutions when they can. Unlike P2P platforms, these organizations are accredited and highly regulated.
- Availability — Without regulation, it may be hard to get your hands on this kind of funding.
How Do They Compare to Installment Loans?
On the surface level, they’re similar. Installment loans are also a termed financial product that’s due back over a series of payments.
How they differ comes down to two major things:
1. The currency. You’ll receive funds in the official currency of your lender. If you reside in the U.S., you’ll deal in USD. For reference, 1 USD is equal to 0.000020 BTC.
2. Your needs. Crypto-based financial products may be ideal for people or businesses that don’t have the best credit score, need large amounts of cash over the long-term, and are willing to accept the risk of the volatile market.
If this risk is too much for you, a more traditional installment loan from banks or online direct lenders dealing with dollars may be a better option.
They may provide fewer funds, but they come with the backing of a regulated industry. Installment loans for bad credit are also available if you apply for a loan with MoneyKey and other online direct lenders.
There’s a time and place when borrowing in Bitcoin might make sense. Whether it’s the right time for you depends on your risk tolerance to its volatility.
Borrowing money is a personal decision. Taking the time to see how your options compare to your needs can help you decide one way or another.
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