Borrowing with Fixed Vs. Variable Interest Rate

There are two main types of interest rates – Fixed and Variable, and it is important to understand them if you consider a loan.

Variable or Floating Interest Rate 

Investopedia:

variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest rates change. 

Variable interest is utilized by the majority of DeFi projects in the crypto ecosystem. The rate is based either on supply and demand balance or set by foundation or users.

Supply & Demand

Usually, this established from the utilization of a chosen asset. The utilization is the amount borrowed vs the amount lent for that particular market. The higher the demand – the higher is the interest rate.

Governance 

Let’s take Maker DAO as an example. Their holder set stability fee (it is interest rate basically) by a vote. It ensures transparency and that the interests of MKR holders are taken into account. 

Pic by http://defipicks.com

Fixed Interest Rate Loans 

Investopedia:

Fixed interest rate loans are loans in which the interest rate charged on the loan will remain fixed for that loan’s entire term, no matter what market interest rates do. This will result in your payments being the same over the entire term.

What is better?

A fixed interest rate is the “safer” option because there are only 2 possible options – the market interest rate goes up or down.

If the market rate goes up – you are protected by a fixed interest rate.

if the market rate goes down – you are “losing” potential profits, but there is an option. You can close your loan and open a new one, on better terms.

We designed the interest structure for Squilla.Loans with the best interests of borrowers in mind:

  • Fixed Interest Rate
  • NO early repayment fees
  • 1-day minimum loan term

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Chose the best terms for your crypto.