The comparison between Traditional lending & NFT lending
Investors used to have only one option when it came to applying for a loan: their local banks. Currently, there are hundreds of ways that provide fast loans, and the terms are sometimes more reasonable. Let’s find out the differences between traditional lending and one of the latest alternative lending solutions, which is NFT lending.
Before getting to know well about the similarities and differences between traditional lending and NFT lending, let’s take a glance through these definitions.
Traditional lending is a type of borrowing offered by banks or financial institutions that permits repayment in installments over a predetermined period of time. Depending on its purpose, a bank loan is typically for one to twenty-five years with monthly payments.
NFT lending, a type of alternative lending, provides intermediary-free crypto loans with NFT assets listed as collateral. It seeks to offer a permissionless, open-source, and transparent financial service environment.
According to the definitions above, we can sum up with ideas about similarities between traditional lending and NFT-backed loans. With similarities, traditional lending and NFT-backed loans are both finance solutions for borrowers and lenders. They are both types of investing to make more money through interest and fees which borrowers have to pay when they borrow money. What about the differences?
Traditional lending vs NFT lending: The differences
Traditional banks or financial institutions typically offer a wider selection of financial services and products, as well as lower APRs. Their prolonged histories also give them plenty of experience to draw from. This implies that anyone with an excellent credit score or any experienced company should at least give it some thought.
Traditional lending is usually used for: Startup; Franchise financing; Cash flow; Equipment and/or machinery purchases; Upgrades; Business acquisition; Purchasing Property; Debt Consolidation; Working capital and so on.
However, since they were the only game in town for so long, they were able to be a little pickier about who they chose to lend to. This traditional lending method also has significantly stricter requirements for applications and lower approval rates. It means that borrowers won’t typically obtain your loan money as quickly.
The biggest difference between traditional lending vs NFT-backed loans is that NFT-backed loans can enable you in obtaining higher returns compared to traditional peer-to-peer (P2P) loans or any type of traditional lending. Decentralized lenders charge greater interest rates than conventional banks do.
In the world of DeFi and with NFT lending, anyone can become a “bank” because they can lend their crypto to someone else and earn interest on the loan. To operate loans without requiring a lot of paperwork from a third party, there is a smart contract that acts as the DeFi loan distribution authority. In contrast to traditional lending, where borrowers must provide mortgages in cash or another form, NFT lending allows borrowers to list their NFTs as collateral when applying for a loan.
Another difference between traditional lending vs NFT-backed loans is liquidity. Traditional lending helps borrowers with certain needs, etc. investments. But the NFT-backed loans appear as the solution for low liquidity in the NFT market. NFTs are not fungible, which makes them relatively illiquid. The market has additional liquidity thanks to NFT financing. Borrowers can increase the liquidity of their NFTs while lenders get paid interest on their loans by using NFT-backed loans.
To sum up, based on traditional lending and NFT-backed loans, we can see the similarities and differences between the two types of loans currently on the market. Although new to the market, NFT-backed loans have excited many NFT investors because they are considered this type of loan as a solution to the problem of low liquidity in the NFT market. In addition, this form of lending also offers a higher interest rate than traditional lending. Rikkei Finance recommends that before officially investing in any type of loan, do your research carefully before making a decision to avoid unnecessary risks.
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Disclaimer: The information herein is for educational purposes only and should not be considered financial, investment, or trading advice. Please conduct your own research and due diligence before making investment decisions. You understand that you are using the Information provided at your own risk.