Traditional lending system is kind of having lot of benefits like low interest rates and not really any need for collateral for some kind of loans but for decentralized we need to give something that equals to the value we are getting so it better to sell that and have the money we wanted in my opinion.
That's not true. When you need a big loan, you need mortgage. And when you need a smaller loan (like for buying a car), a bank can confiscate your assets if you can't pay back your loan. In decentralized lending system no one can confiscate your assets in order to pay back the loan.
As for selling crypto instead using is as a collateral, why would that be better? If you give BTC as a collateral, you can get loan and then when you pay it back, you withdraw your collateral. In the mean time BTC price can go up and you would be sorry for selling your BTC instead using it as a collateral.
So what will happen when the user dafualt loan on defi platform? He could never access the collateral which literally mean we lost our property/asset right?
Don't forget smart contracts codes were exploited in the past so if that happens then you might lose your assets as well.