In this blog we will look at a non-purpose loan, and examine how it works within the framework of a Blockchain-backed loan with SALT Lending.

Investopedia defines a non-purpose loan as

DEFINITION of ‘Non-Purpose Loan’

A type of loan that uses an investment portfolio as loan collateral and the proceeds of which can not be used to purchase, carry or trade securities. This type of loan allows investors access to funds without having to sell their investments. Regulations require financial institutions to disclose whether a loan is a non-purpose or purpose loan, and borrowers are required to indicate the purpose of the loan.

BREAKING DOWN ‘Non-Purpose Loan’

With a non-purpose loan, investors continue to receive the benefits of their portfolio holdings, such as dividends, interest and appreciation. If the value of the pledged securities declines, however, the lender may require that additional securities be put up as collateral or that part of the loan be repaid to make up for the decrease in collateral. This type of borrowing is considered an alternative to traditional margin borrowing because it allows multiple investment accounts to be used to secure a loan.

With the SALT Lending platform, we use blockchain digital assets as the collateral for the loan for the duration of the lending period. This is held in a secure smart contract, monitored by an oracle to ensure loan performance. In the event of a loan being repaid in full (and we don’t have early repayment charges), the smart contract will release the blockchain assets back in full at the end of the term. This allows borrowers to put up bitcoin or ethereum as collateral, and then borrow against this to a maximum of 80% of the loan-to-value ratio without having to sell the underlying asset and having any associated taxable/capital gains events or losses being incurred.

In the case that over the course of the loan, the underlying digital assets appreciate in value based on the market price, the LTV reduces in line, and the borrower has access to cash, and gets their digital assets back at the end of the term, which have themselves appreciated in value.

In the event that there is a decline in the value of the digital assets behind the loan, the Oracle will contact the borrower with a couple of options to bring the loan performance back into line. These can include depositing further collateral to bring the LTV back in line, making additional cash repayments to reduce the balance of the loan, or in the event of neither of these being possible, to liquidate a portion of the collateral to bring the LTV back into line.

This gives both SALT and the borrower plenty of options to make sure that the loan is being repaid, and given how divisible the underlying digital assets are, to never fully liquidate collateral unless no repayments have been made.

Moving onto the purpose of the loan, people want to borrow for many reasons. Examples of individual loan usage could include; pay for household bills, college tuition fees, a holiday, a new car, paying off other loans such as credit cards which have much higher rates of interest, or day-to-day cashflow. Businesses can also use the SALT platform, and these can be used to invest in office space, capital purchases of equipment, day-to-day cashflow or wages, as well as a plethora of other reasons.*

We will be releasing further information here on Medium over the coming weeks, but if you want to stay up to date with all things SALT, we’re providing a variety of ways in which you can contact the SALT Team and you can follow @SaltLending, like Salt Lending on Facebook, or see our videos on our YouTube channel. We also have a handy RSS feed to this blog.

* These examples are not to be construed as investment advice.