How to Borrow Money Safely Without A Credit Background Check
Whether you would need that extra cash for home fixtures, for education, or to finance your wedding, a (responsible) loan can solve your problem relatively easily without selling your other existing assets.
And when the thought of a loan comes into mind, banks are usually eager to come to the rescue. But are they the only option around?
Traditional Borrowing: Banks 🏦
You loan’s approval largely hinges on your credit score. This can take several banking days, weeks, or sometimes, even months to be settled… if it ever gets settled!
Credit History: TradFi, or Traditional Finance, is known for its meticulous background checking before you even open an account, much less apply for a loan. Your job title, salary, and other pertinent information about you needs to be verified whenever you deal with a bank.
Collateral: Other than the intensive background checking and depending on the type of loan you are applying for, a loan collateral might be necessary for your application to proceed. This is common on mortgage, car loans, and business loans, and less common on personal loans.
Interest Rate: There are stable and variable rates in a bank. Using the former or the latter solely depend on the type of loan you are applying for, and of course, on the the decision of your bank. Your credit history will also affect the interest rates of your loan. Generally, the higher your default risk, the higher your rates will be. It’s also important to note that the central bank authority has direct influence with the current rates in the TradFi market.
Unlawful Borrowing: Loan Sharks ❌
Despite the lucrative offering of the current banking system that we have today, some people still can’t get easy access with funds.
About 69% of the world population has access to banks. However, that number becomes significantly lower in less developed countries, and in the most disadvantaged social classes.
Since banks demand rigid requirements and extensive background checking, these people, usually in a fragile financial situation, commonly resort to alternative banking systems, often illegal and unreasonable, such as loan sharks.
Loan sharks have a reputation for a very high interest rates and required collateral, and sometimes, it becomes very problematic for both parties when it comes to liquidity and repayment terms because there is no standard process. They can basically ask for whatever they want and you will be at the mercy of the person or entity behind the lending system.
Alternative Borrowing: DeFi ✅
Most institutions today call DeFi, or Decentralized Finance, the future of banking. Nothing has alarmed the whole financial system until the arrival of the blockchain technology and cryptocurrencies.
Most people also considers DeFi as an opportunity rather than a threat to the banking sector that we have now. It bridges the gap that the traditional finance left for less fortunate people, and someday, it’s hoped to fixed the flawed loan shark lending.
DeFi is accessible to anyone with an internet connection and a crypto wallet, eliminating the methodical approach of the traditional finance and opening the gates to the millions of unbanked people, and people with no good credentials to be approved of borrowing.
Credit History: There is no need for credit history or any sort of background checking in DeFi.
Collateral: This is the only requirement to get a loan in most DeFi platforms. Majority of them has Loan-to-Value Ratio of 80%, sometimes, up to 95%. This means, when you deposit and have $1,000 as collateral, you will be able to borrow at least $800, up to $950.
Interest Rate: There are also 2 types of interest rates in DeFi: stable and variable. However, the most significant difference with the traditional finance is that the interest rates in DeFi are influenced by the liquidity in a pool. Up to now, variable rates reign the DeFi realm with a few platforms that offers fixed rates, such as iGain IRS. Despite that, the borrow rate in DeFi is generally lower compared to TradFi.
Conclusion:
The banking system that we have today may work for someone who has a good standing and status in life, but may leave countless numbers of people who desperately need funds, yet not eligible enough to apply for a loan.
DeFi removes the bureaucracy of the TradFi, allowing people to borrow with only the condition of having collateral. Although type of borrowing that is peer-to-peer, trustless, and credit-less is still far from reality, that’s certainly the next big thing that DeFi hopes to solve.
