Blockchain P2P Lending – People usually borrow money from a lender or a bank to start a business or for personal reasons like home furnishing, education, and automobile purchase. The borrower can either make a one-time payment at a fixed rate of interest or small installments for a certain period.
In the traditional lending process, people require intermediaries like a loan officer, underwriter, and loan processor to build the trust. But adding middlemen and regulations to the process of lending leads to the high fees.
Also, applying for a loan can take a couple of weeks, and the rate of interests differ widely around the world. For example, the rate of interest for lending money in different countries like Algeria, Argentina, Bangladesh, United States is 8%, 31.2%, 9.5%, and 4.8% respectively.
Using blockchain in peer to peer lending can help remove intermediaries from the current system. Let’s understand how blockchain can help make lending process more efficient.
- Cost Reduction: Blockchain can reduce the costs by allowing the borrowers to deal with lenders directly.
- Time: Blockchain can make the entire process quick by adding regulations in the smart contracts.
- Different rate of interest: The smart contracts can auto-generate the fixed rate of interests based on the profile of a borrower.
Blockchain can connect borrowers and lenders from all over the world through a decentralized platform. The entire lending process could become seamless and trustworthy.
People involved in a Blockchain Peer to Peer Lending Platform:
- Lenders: a person who lends the money.
- Borrowers: one who requests for a loan with the intention of returning it within a certain duration of time.
- Guarantor: a person who takes the guarantee of a borrower requesting for the loan.
Workflow of the Peer to Peer (P2P) Lending Platform on Blockchain
Step 1 – Lender creates a profile
A lender creates a profile with the information including:
- Personal Information (Name, Address, and ID number)
- Bank Account Information
- Type of Investment a lender wants to make. For example, a lender might wish to lend money to the borrowers requesting a loan for the business purposes.
- Criteria for different types of borrower, i.e., setting up the rate of interests according to the worthiness of a borrower.
The profile is submitted to the marketplace where lenders and borrowers can find each other.
Step 2 – Lender waits for the loan requests
Once the account is successfully created, lender waits for the loan requests from the borrower. As soon as any request is received, the lender schedules an interview with the borrower.
Step 3 – Borrower creates an account
A borrower setups an account with the following information:
- Personal Information including name, address, and government-approved ID
- Collateral- Crypto-coins, legal documents, and a guarantor.
Step 4 – Borrower sends a request for the loan
After creating the account successfully, a borrower can send the loan request to all lenders around the world. Smart contracts allow borrowers to send loan requests to the lenders who are interested in the type of investment a borrower wants to make.
Step 5 – Lender interviews the borrower
After receiving the loan request, a lender interviews borrower and asks the following questions:
Why do you want to take the loan?
What is your monthly earning?
What is your repayment rate?
How many times have you applied for the loan in history?
A lender can either approve or reject the loan application based on the above set of questions.
Step 6 – Smart Contract fixes the rate of interest
If the lender approves the loan request, the smart contract decides the fixed rate of interest for different types of borrowers. The borrowers can be categorized as high-risk, medium-risk or low-risk borrowers based on their repayment rates. For example, lenders can set the low rate of interest for a low-risk borrower having good repayment rate in a smart contract. Using Peer to Peer Lending, the rate of interests remain fixed all over the world.
Step 7 – Auto-payments using Smart Contracts
Borrowers can make the payments using smart contracts embedded with a crypto-wallet. If a borrower does not pay installments timely, the smart contract adds late fees to the actual amount and upgrades it on the ledger. So, if a borrower abides by the terms of the loan, the smart contract would automatically deduct penalties.
P2P lenders using blockchain can help reduce delays, make quick approvals, eliminate the need for middlemen, and bring transparency. Blockchain-based P2P lending platforms allow investors to approve loans against residential properties, but the value of properties don’t remain stable always. Moreover, the collateral provided by the borrower is not verified by a legal authority while lending money through the P2P platform.
But the credibility can never be changed as smart contracts enable auto-payment. Companies like SALT Lending, Lendoit, and Jibrel Network have already launched peer-to-peer lending platform using blockchain and smart contracts.
If you are searching for a blockchain development company to build a blockchain-based P2P lending platform, talk to our experts and get a consultation.
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