Redefining Financial Lending with Blockchain
Loans and mortgages have been carefully navigated as consumers regain trust in big banks and institutions learn to strictly adhere to financial law following the 2008 U.S. economic recession.
Today, loans powered by modern technologies like blockchain present a strong option for consumers looking for more security and trust for their lending needs.
A new innovation in the finance industry, blockchain lending builds on the peer-to-peer model of blockchain and incorporates traditional lending to create a time-efficient, seamless system.
Through blockchain lending, traditional banking becomes obsolete and the reliance on third-party intermediaries is eliminated. This automated, decentralized system significantly reduces operational risks and speeds up the loan process.
Adhering a set of rules, blockchain technology can also alleviate stress during financial uncertainty, preventing cases similar to the 2008 financial crisis. Overall, blockchain adds trust, reliability, and confidence to the complex lending process.
Handling Home Loans
Under home loans, blockchain has the ability to condense the lengthy, complicated mortgage process by eliminating third-party intermediaries, certifications and inherent delays in processing. This can improve the loan procedure entirely by reducing costs, developing incorruptible records, and promoting rapid settlement for all parties involved.
A Breakdown of Mortgages with Blockchain
In origination, an individual, known as the borrower, applies for a new loan. This application is then sent to a lender for processing. A standard procedure among all loans, this initial step can be improved with accurate record keeping through blockchain technology. Lenders will also have detailed, breakthrough access to borrowing information and data from their lead generation procedure.
When a loan is fulfilled, the lender provides estimates of the loan amount and issues the loan itself. Blockchain can speed up this process by providing estimates within 3 days and details on the receival of documents with time-stamps.
During a loan closing, many documents must be presented on the borrower’s side, adding stress to this complex process. With smart contracts via blockchain, the closing of a loan can be accelerated with precision.
Servicing occurs when the lender collects interest, principal and escrow from the borrowing. As complicated exchange of information and money, servicing can be improved using blockchain with heightened tracking of payments, increased data accuracy within loan transfers, and ease of asset movement to servicers due to blockchain’s validation requirement.
5. Secondary Market
Unseen by the typical borrower, the secondary market provides a space for loans to be bought and sold by various lenders and investors. With increased distrust in this market due to the 2008 recession, blockchain offers extreme transparency of ownership of assets and can streamline several transaction processes. For example, smart contracts can be implemented in Master Services Agreements, Investor Contracts, and Pooling and Service Agreements, which cannot be easily manipulated and can be viewed within the chain. Blockchain’s automatic, immediate update of information further ensures the safety of secondary market deals.
Solutions for Student Loans
With the growth of college tuition and attendees, student loans have reached an all-time high of $1.4 trillion and will only continue to grow. Yet, student loans remains untapped as far as innovative lending solutions using blockchain and P2P lending.
Seeing the difficulty of obtaining student loans, companies like VestEdu have created ways to make the dream of higher education into a reality. VestEdu has operates as a “Social Impact Investment platform [focused] on college education for the underprivileged student population” domestically and internationally. Founder and CEO of VestEdu, Prakash Goswami believes VestEdu can revolutionize the lending industry by, ”creating a system where birthplace does not dictate our lives using technology. No matter where someone is born, they should be able to fund their college education.” With a universally understood mission and forward-thinking technology, VestEdu sets the stage for future startups looking to specialize in and transform student lending with blockchain.
A common process among loan borrowers, refinancing exists as a promising option for those looking to take more control of their loan terms and hoping to change their financial circumstances. Unfortunately, many face difficulties in the complicated process of refinancing in terms of high fees, potential penalties, and repayment.
Luckily, financial startups are working to revolutionize traditional refinancing with consumer-oriented platforms and blockchain technology. For example, Robin strives to implement long-term and transparent financial management for today’s consumer through refinancing, insurance and savings. In their refinancing sector, Robin enables “flexible repayments varying from month to month according to your available resources and dynamic lifestyle”. Robin’s founder and CEO Yossi Yarkoni explains that using, “blockchain enables us to offer loans at a reduced risk with multiple lenders allowing flexible repayments without any trust issue between the different lenders”, reducing intermediaries and increasing assurance in refinancing.
Players in the Game of Loans
On the borrower side, blockchain lending has the potential to make loans accessible to those who are not suitable for traditional lending. With more than half of Americans considered “financially unhealthy”, blockchain offers an opportunity for low or diverse credit holders to obtain loans. In addition, borrowers on average can save 1-2% through blockchain lending with its elimination of intermediaries, lowering overall closing costs.
Traditionally, intermediaries are posted at nearly every stop throughout loan approval, lengthening the process to up to 2 months. However, blockchain has the potential to remove intermediaries entirely, including extra costs like legal fees and underwriting expenses. Instead, artificial intelligence and machine learning technology can replace intermediaries and work in conjunction with the blockchain smoothly.
In the secondary market, thousands of lenders and investors are engaging in transactions every day, making tracking excessively complicated. Blockchain can create a nationwide system for land records and supplant individual country records, further supporting the usage of smart contracts in this market.
As a whole, blockchain has the potential to completely revolutionize financial lending, adding efficiency and accuracy to the outdated procedure (even if there have been cases of blockchain hacking!). For both home and student loans, blockchain creates a heightened level of security to instill trust in borrowers while eliminating all inherent delays associated to processing, compliance, and intermediaries for lenders. As blockchain continues to transform the lending industry, startups and corporations alike are adapting to provide innovative, reliable financial services to consumers worldwide.
Blockchain is a great option to guarantee security and trust on financial lending. But there's so much more going on.
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