Fixed Interest Rates Will Keep You Afloat In The Coming Recession
Fixed interest rates could be the only certain thing in times of market uncertainty
TLDR:
- When borrowing, a fixed interest rate avoids the risks associated with variable interests, where rates are subject to change.
- Fixed interest rates can be higher than their variable counterparts, but there are other platforms that can offer competitive fixed rates.
What is a fixed interest rate in DeFi?
There are generally 2 types of interest rates in DeFi today: fixed and variable.
A fixed interest rate, commonly called a stable rate, is simply a rate that does not change for a set period of time.
Borrowers who do not want their interest rates to fluctuate over the term of their loans, potentially increasing their interest expenses, will prefer a fixed interest rate. This rate avoids the risk associated with floating or variable interest rates, in which the rate payable on a debt obligation can fluctuate based on the market condition or the supply & demand in a liquidity pool.
The interest rate on a fixed-rate loan remains constant throughout the loan’s term, and because of this, budgeting for the future is easier and more predictable. The only caveat is that fixed rates normally come higher than the variable rates.
Calculation:
If a DeFi protocol like Aave is offering a 7.40% APY at a stable rate, and you borrowed an amount of 1,500 USDT, the interest you will pay in a year will be 111 USDT.
Fixed or Variable Rate?
Variable interest rates are generally lower than fixed rates because it comes with some uncertainty, which is already priced in the fixed rates.
Let’s say our variable rate is 1.15% APY, and you borrowed an amount of 1,500 USDT. However, since its variable, it fluctuated to 3.9%, then 12.6%, and finally, 2.45%.
The variable interest you will pay is 75.30 USDT, as the average variable interest in the duration of your loan term (assumingly) was 5.02%.
But, crypto is known to be volatile, so in some instances, your variable rate could go wild from 1.15% to 12.9%, to 32%, and back to 2%.
In that scenario, the amount of USDT interest you will need to pay in a 1,500 USDT loan is 180.15 USDT, as the average rate was 12.01%.
I want fixed rates but it’s higher than the variable rates. Can fixed rates still be made lower?
Currently, most fixed rates are 2x — 3x higher than the variable rates because that’s the premium you pay in exchange for having a predetermined interest.
However, there are DeFi platforms nowadays that can make your fixed rates even lower, sometimes, at par with the variable ones.
iGain IRS is one of them.
When you avail of a loan through the iGain platform, you are actually utilizing the Aave and Yearn protocol. Long derivative tokens automatically come along with your loan, and these tokens make it possible for you to hedge interest rate fluctuations.
You are then being assured that every time your borrow interest rate goes up more than what you have availed, the Long token will act as leverage and gain profit from the increase, thereby subsidizing your total rate.
For instance, you managed to get a fixed term on iGain IRS at 4%. Even if the 4% rises up to 10%, the 6% percentage points difference will be shouldered by the profit from the Long tokens, so you will still be paying with the 4% rate.
Fixed interest rates are often preferred by people with long-term loans, as it guarantees that they will be paying the same amount every time for the whole duration of their loan.
In the end, whether you’ll get a fixed interest or a variable one, depends entirely on your goal, the duration of your loan, and your risk appetite.
