Secured Loan using ClearCoin Escrow
Bob is about $33 USD short in trying to buy a new ATI 5970 however he expects to have the money in 30 days. Bob has a stash of bitcoins from which he would be willing to put up collateral for the loan. Mary has extra cash and would be willing to loan some of it out in exchange for a fair return while at the same time minimizing her risk. She might be willing to loan it out at 3% per month (a 36% annual rate), for at most one month.
The following is a suggestion as to how this transaction might be carried out.
- Asks to borrow an amount for a certain number of days. This request might be noticed by willing lenders if it is announced in the #bitcoin-otc IRC channel.
- Considers borrower's request, including possibly reviewing the Bitcoin Web of Trust.
- Offers to loan the money but requires that the borrower put down as collateral bitcoins equivalent to X% of the amount borrowed.<ref>The loan agreement should also address the penalty for failure to repay by the due date. If the loan is not made using a simple interest calculation, then the compound interest method should be fully communicated in the offer.</ref>
- Sends BTC as collateral to lender.
- Subtracts the amount for the interest from the payment.
- Sets up a ClearCoin escrow for the balance (will be released after loan is repaid).
- Sends the loan amount to borrower via PayPal<ref>Generally the borrower would prefer to receive payment as Personal, Payment Owed, however because of PayPal's usage agreement, the borrower may prefer to have the lender send the loan amount sent as a normal "Purchase" transaction. When it comes time to make the loan repayment, the borrower may simply issue a refund in full, and all fees will be refunded as well -- causing this transaction to be performed by PayPal for free. Additionally, if the loan repayment is made using this refund method, there is an even lesser chance of a chargeback.</ref>.
- On or before the due date. borrower sends loan repayment to the lender via PayPal.
- Upon receipt of loan repayment, releases the Escrow.
Using the example from above
- Bob inquires about loan terms from Mary for borrowing $33.
- Mary extends a loan offer to Bob. The collateral requirement is 100% and the interest is 3% per month, or a 36% annual interest rate.
- The interest rate is to be compounded monthly, and the penalty for late repayment is a hefty 10% of the outstanding amount due.
- The current market rate (best ask) is $0.33 per BTC, so Bob then sends 100 BTC for collateral plus 3 BTC for the interest (a total of 103 BTC).
- The escrow incurs a fee of 1% on amounts over 100 BTC, however the escrow amount for this is not over 100 BTC so there is no fee.
- After receiving the 103 BTC, Mary opens a ClearCoin escrow to send 100 BTC to Bob's Bitcoin address and then sends 100 BTC to fund the escrow account.
- Mary then sends a payment of $33 PPUSD to Bob's PayPal Address.
- Thirty days later, Bob refunds the $33 PPUSD payment and Mary in-turn then releases the escrow.