Smart contracts can significantly enhance and improve the business processes in the lending industry. Many lenders and banks are looking to use the potential of Blockchain ledger and develop platforms that add value to the lending process for the borrowers.
Improvements for Borrowers
A Blockchain based platform in the financial sector will improve the process for borrowers in five ways.
Smart contracts are executed through a distributed ledger system, which is openly available for viewing by authorized users at any time. The borrowers can quickly check the record of transactions whenever they want.
These ledgers are backed up on data nodes from all around the world. Even if there is an accident to one data node, there is no chance of accidental loss of records.
Instant Loan Processing
Right now, the borrowers have to wait for a long time to get their loan applications approved. Consider the home mortgage industry. It takes two to three months from the initial loan application to final approval and disbursement of funds.
These delays are caused due to inefficiencies in the verification process. A borrower requires verification from his or her employer, the homeowner’s association, the credit rating agency, Title Company, county tax assessor, previous mortgage bank, FEMA, home surveyor and appraiser among others. Since so many parties are verifying each document separately, delays are an unavoidable part of the lending process.
A blockchain platform would allow the verification process to be completed within days. When all the stakeholders are given access to the network, the verification is takes minutes.
A Secure System
Blockchain based smart contracts operate through a decentralized ledger. This means that the record of transactions for a loan contract is saved on thousands of computers around the world.
Attempts to hack or manipulate the record are checked by thousands of distribute ledger holders. While it may be possible to hack one or two computers, no one can simultaneously hack the majority of systems on the network.
This is what makes Blockchain ledgers safe and a trusted way of borrowing money.
Privacy Is Built-in
Although the Blockchain ledger is accessible for auditing the record, the identity of the borrower can be hidden behind an IP address. On the Blockchain, transactions and contracts are executed between cyber addresses instead of named individuals.
A lender and other stakeholders who are part of the process would be aware of the borrowers’ identity, but external third parties would be completely unaware of this information.
A Way to Get Credit Scores
The main reason for the rejection of loan applications is low credit score. First time borrowers are usually not aware of their credit score. Some people are not even aware of where they can find out their score or how to improve it.
The Blockchain platform lets borrowers build their credit scores on a secure ledger and form the basis of a transparent credit rating system. This would allow lenders to easily review the borrower’s credit history to make a decision on loan approval.
It would also let the borrowers know the chances of success for their loan application prior to application.