Applying for a loan is time consuming and involves credit checks, because the issuing bank wants to ensure you won't default on the loan. The positive aspect of applying for a loan is that offering collateral isn't part of the process. You do have to sign an agreement that you will repay the loan, often within a certain timeframe and with a determined interest rate. The longer your loan duration, the more interest you pay towards the loan. Would Compound allow you to borrow without collateral? Read on to find out.
Compound Finance is a platform that doesn't use credit checks or KYC. Instead, it relies on a system of overcollateralization -- you add more assets than what you need to borrow. The greater the supply balance, the greater your borrowing power. You need to offer collateral since you're borrowing from yourself and not a financial institution. At this time, not utilizing collateral on the platform is impossible.
Adding collateral has its benefits. You can accrue potential interest every 15 seconds, as that's approximately how frequently new blocks of Ethereum are added to the protocol. However, the interest rate is still dependent on the market value which fluctuates.
You can choose from many asset types, but you can reach out to Compound Finance's help desk if you need help. Link a compatible external wallet to Compound and deposit your assets:
Every asset is shown in the Supply column; you can use the sliders next to each asset type to use them as collateral against your loan. Your Borrow Limit is located on the right of the Assets column.
Compound may be completely automated, but it does have some safeguards in place. Your collateral could be liquidated at a potentially lower market rate to satisfy the loan and incur a cost in case there's not enough collateral to repay it.
Community members also help the platform by acting as liquidators. They use tools such as Compounder Liquidator browser extension and in exchange are given collateral at a better market rate to compensate for paying others' loans.
One benefit of repaying a loan on Compound is paying less interest during the loan's terms. Select the asset related to the loan that you need to repay. Click on the Repay tab and choose your payment amount. Select Max to repay the full balance or enter a smaller amount. Click the Repay button after you reviewed your payment. Check your digital wallet to verify the payment was deducted from your account.
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