Bitcoin lending is a thing and that’s why OP brought it up, it’s happening but I don’t see it as a very good choice, though different individuals situations may cause them to make certain choices.
I think instead of making your bitcoin holding a collateral on a loan you’ll most definitely pay back with interest it’s better to sell part of the bitcoin to cover for whatever problems one might have.
But a better solution is building/owning backup funds because for an investor it is very important to save you from such situations where you have to take loans. Even if what you have as backup funds isn’t enough to cover your problems, now you wouldn’t be selling much of your bitcoin cause your backup have solved part.

This is a safe approach and experienced people will possibly prefer to do this. People who are careful would prefer to do this too but if they are actually careful, chance of falling into such financial troubling situation is small enough. If they unfortunately fall to this, with their careful instinct, they will sell their bitcoins to have money to use, to resolve their financial needs or troubles because it's the safest way.

No unnecessary loan interest, no extra pressure, and after they successfully pass through such financial troubles, they can come back to the market as Bitcoin investors.

Being in a financial trouble, being at risk is already bad, but if they take loans, they take more risk, escalate risk, that's worse.

If someone is willing, why not! There are many factors to consider when using Bitcoin as collateral to get money, because there may come a time when we suddenly need cash to pay for something, especially if we don’t have an emergency fund. One consideration, in my opinion, is the trustworthiness of the party accepting our Bitcoin as collateral—whether we can trust them to honor the agreement even though Bitcoin’s price is highly volatile.

In this regard, I think it depends on the level of liquidity. If it’s possible to sell a small portion to cover the cost, I would certainly do so. If the amount is large, I’d be better off going to a bank and using my securities as collateral to secure a loan.

I am sure you have not heard about it before because if you had then your opinion would be different. Allow me to tell you that, when lenders gives loan they don't give 100% loan of your collateral they can have different Loan to value ratio (LTV).

Means, they never gives 100% loan, they can give 50% or 70%, depends on their offers. Same deals are given when you are using BTC mortgage. So they already keeps the volatility in mind. So you can use BTC to take loan.

Imagine you can save yourself from taxation if you just can take loan on your BTC. You don't get to sell your position, you can get cash, spend as you want and you don't even get to pay tax for it.
Read this and search about it.
https://bt.irlbtc.com/view/5593104.msg67112252#msg67112252

This is the reason why if you're investing in bitcoin for long term, you need to prepare for the worst case scenario by setting up an emergency funds to tackle any unforeseen circumstances that pops up to make you sell your bitcoin when it's not of your will or in a situation like this.

Your emergency funds will prevent you from using your bitcoin to take loan and put it at risk. I don't like taking loan because it is like a set back if the money isn't used to make more money.

Even if the person giving the loan keeps to the agreement, what if things doesn’t go well for the person borrowing as planned. The person borrowing might end up with issue of having difficulty in repaying his loan and he might end up loosing his bitcoin, so it better he just sells little portion from there and use.

People who are  wellprepared for holding bitcoin always need to have done their homework because it's also important, and without having a good amount of emergency funds, never stand for any strategy; this will hit you hard, and things are surely going to never be in your favor. Having a loan for your bitcoin is also not a good idea because paying interest and then transaction fees is also not a good deal. Bitcoin volatility is one of the biggest threats for anyone because people always feel panic and make wrong decisions just because of a few things that are always natural or part of Bitcoin. It's never been recommended to just focus on accumulation; it's also important to have some good strategy, and emergency funds are also best. Without these, never try to start this.

Borrowing against your Btc is very dangerous, anyone who understands bitcoin will never try that because the person will know that he did not know what will happen to the bitcoin in some days or at any time, the best thing for anyone in a tight corner or any bad situation is to sell some part of his bitcoin and solve the problem, and when he has the opportunity to buy it back, he can buy it back. What every investor should know is that they should never use their bitcoin to take out a loan or borrowed from anyone, bitcoin cannot be predict and will never be predicted, instead, sell some part of your bitcoin and do anything you want with the money and have peace of mind.

Some people may be interested with the idea, but others may keep using a safer way. Making Bitcoin as a collateral isn't really safe because it fluctuates. I'm not really sure how to measure the value of Bitcoin if someone wants to take a loan for years.

I prefer to sell a small number of Bitcoin. However, I will wait for the Bitcoin price at the green market first. Or I will consider to use my saving if it is for urgent matters. TBH, I avoid borrowing money because I think it isn't the best way. It even rises possible problem if we have no clear plan for the repayment.

If we have monthly income, it is no problem to take a loan with the amount of money that we easily to repay the loan.
No problem to repay with the possible profits in Bitcoin. But we must ensure that the people who give us the loan money, they don't mind to wait for a quit long time. We actually know the common pattern of the cycle, including the time for bullish and bearish.

The tradeoff really comes down to where you’re more comfortable placing the risk, trusted third-party custody or smart-contract risk. What I find interesting about TBV is that it’s trying to keep the Bitcoin native while removing the need for a custodian. But like you said, the real test is what happens after mainnet launch and real users start putting meaningful BTC through it. October should be an interesting one for sure.