To loan or not to loan: Why interest rates are lower on the blockchain

Decentralized financial services are providing a more secure means to lending and borrowing. Using blockchain technology, P2P network exchanges are excluding intermediaries and utilizing self-executing smart contracts that offer a more efficient process for borrowing and lending. Borrowers benefit greatly from these innovative financial technologies as marketplace lending platforms are generally more credit inclusive and have a higher likelihood of approval.

The prospect of taking out a loan can be a frightening one. As an applicant, you’re judged by your credit score, your assets (or lack thereof!), among other financial characteristics that determine your ability to pay all that borrowed money back. Let’s say your application is approved. Now what? You have to wait for the loan to be processed by an unspecified amount of intermediaries and then eventually, the money is transferred into your account, often after you need it.

Now, it’s time to start paying the loan back. But wait! You forgot to factor in the high interest rate tacked on to your monthly payment into your spending budget. Luckily, we’ve entered a new phase of the digital age where technologies are migrating to the blockchain, and this includes financial services that were once a grueling, nerve-racking process to endure.

Decentralized financial services are providing a more secure means to lending and borrowing. Using blockchain technology, P2P network exchanges are excluding intermediaries and utilizing self-executing smart contracts that offer a more efficient process for borrowing and lending. Borrowers benefit greatly from these innovative financial technologies as marketplace lending platforms are generally more credit inclusive and have a higher likelihood of approval. Not to mention, lower overhead costs means savings can be passed on to the customers, reducing fees and interest rates. This results in the inevitable: lower interest rates for all.

Let’s break down why interest rates are lower on the blockchain when compared to traditional financing solutions:

#1: Optimal trust

Blockchain technology unlocks trustless financing by use of immutable records that can not be altered, replicated, or hacked. ID verification through a decentralized ledger controlled by the borrower themselves enable faster KYC approvals and ownership of data.

With transactions handled by smart contracts, all parties involved are able to understand the obligations and expectations of every loan agreement and thus not have to trust a central body. This benefits the borrower, who avoids being taken advantage of by deceptively high interest rates and impossible repayment terms; and the lender, who can ensure their funds are handled appropriately.

#2: Risk pricing

If utilized effectively, the blockchain can open the doors for additional data sets consisting of location, education level, online payment histories, etc. to build a more comprehensive profile on the borrower, increasing their likelihood of getting a loan. With additional information on the borrower, lenders can also be more certain of their investment and subsequently offer lower interest rates.

#3: Extreme efficiency

The lending process is streamlined and becomes automated when the loan application and approval steps are administered over the blockchain. Paperwork is 99.9% eliminated, applicant information can be accessed by the lender without additional inquiry, and the time it takes to apply for and transfer funds is decreased.

Blockchain technology enables us to rethink our business models and opens the doors for new, more efficient processes that benefit consumers. I’m very excited to see how more companies can utilize the technology to create the next wave of innovative financial solutions.