FUD (Fear, Uncertainty and Doubt), has become the zeitgeist of our time. Due to the pandemic/financial crisis of 2020, nations worldwide have embraced new monetary policies with unknown and potentially disastrous consequences. The unprecedented levels of quantitative easing concern investors globally as inflation rises. Many investors are seeking innovative yet safe ways to stay ahead in these uncertain times. Let’s look at fixed rate products and how investors benefit from them.
What Is a Fixed Rate Product?
A fixed interest rate product does not rise or fall with the prime rate or other index rate, generally remaining constant. This does not mean a fixed rate loan can never change under certain circumstances. Though the principal and interest of a fixed-rate loan do not change during the life of the loan, the total payment may vary. For instance, if taxes and insurance are included in an escrow account. An escrow account with taxes and insurance paid through the mortgage could see one’s payment change since homeowners’ insurance and property taxes might change.
Fixed rate products allow customers to lock in a set interest rate for a set period. With these loans, however, early withdrawal penalties may often apply. The most common fixed interest loans are student loans, mortgage loans, auto, and home equity loans.
Pros & Cons of Fixed Interest Rate Loans
The benefit of a fixed interest rate loan is the security of knowing that changing market conditions, an increase in the prime, or other index rate will not cause a change to your interest rate. Consider also that if index rates drop and variable interest rates follow, the interest on a fixed rate loan stays the same.
Let’s look at an example of a typical fixed rate loan. You might take out a 60-month $20,000 loan at a fixed interest rate of 3.99%. Monthly payments would be approximately $368. Total repayment with interest would be $22,094.
If the same $20,000 loan had a variable rate, and the interest rate rises, your payments and the total repayment amount would also increase. Conversely, if the interest rate drops, you could save money overall.
The choice between a fixed or variable interest rate depends on one’s risk tolerance level. Keep in mind, though you might find a variable rate loan with a lower initial interest rate than a fixed rate option, you would risk the variable rate increasing before your loan is paid off. If you feel more comfortable with the security of a loan payment that will not fluctuate with the prime rate or other index rate, you will be better suited for a fixed interest rate product. The bottom line is if one is more comfortable with consistency and stability, with a clearer idea of payments over the term of a loan, a fixed rate product will always be the better choice.
The DeFi Alternative
Today, DeFi — or Decentralized Finance — offers lower interest rates for borrowers as it streamlines the process, cutting out the middlemen of traditional banking while offering more equitable availability through its inclusive structure. Many are leaving legacy banks and seeking more innovative means of preserving true wealth, with DeFi leading the way.
DeFi platforms, however, vary greatly. Many are not user-friendly and rely on complex terminology. Others may not be reputable.
EQIFI, a new DeFi protocol, stands apart from other platforms that may offer low fixed interest rates without the necessary security and high level of trustworthiness. Unlike other platforms, EQIFI is powered by EQIBank, a licensed and regulated bank recognized as one of the top ten digital banks in the world, serving customers in over 180 countries worldwide.
EQIFI Fixed Rate Products consist of pooled loans at a fixed interest rate that settle on a specified future date. Customers provide collateral in the form of ETH, wBTC (wrapped Bitcoin), Stablecoins, and select fiat currencies (which are converted into Stablecoins) into pools, which have fixed rates attached to each. The interest rates are algorithmically set through a smart contract.
EQIFI seamlessly bridges DeFi to EQIBank, providing an alternative to traditional banking. Customers of EQIFI may also apply to EQIBank for banking accounts. Visit us today to learn more!