This flexibility in DeFi is heavily underrated. To avoid liquidation, you can either a) pay down a portion of your debt and/or b) add more collateral, both of which make your LTV healthier. On the way down, Aave will realize you’re at risk of not being able to repay your loan and begin selling your ETH to make itself whole.
I vaguely recall my soul leaving my body during that month. It’s probably too painful for you to remember, but Ethereum dipped below $100 in March 2020 during the height of the COVID black swan. The fact is no one knows how ETH will perform in the future. On Aave, your borrow rate is subsidized by a steady stream of AAVE, the protocol’s governance token. Think of this as a promotion for using the platform, similar to the $200 referral bonus I got from my CeFi lender for refinancing with them.
My payments also go through instantly, as opposed to waiting 3-5 business days for it to crawl through the ancient pipes of CeFi. If I’m going through a period of high expenses, I can skip payments without having to worry about calling anyone or impacting my credit score. This means I can pay down my debt, whenever I want, however I want. There’s also no minimum payment and no monthly cycle. The lack of a “repayment period” was a pretty big culture shock. But there are some key benefits so let’s explore the tradeoffs! Benefits of DeFi Loans No Fixed Period Yes, I do still owe that amount to the DeFi protocol. “Hold on ser: you just moved your loan from CeFi to DeFi? Did that actually accomplish anything?!” In other words, if I believed that ETH would appreciate more than 3.5% per year over the next 5 years, I’d be better off holding onto it versus using it to pay off my loan.ĭisclaimer: Whether or not ETH actually performs at that rate is a different story. Rotating out of crypto would incur an opportunity cost in upside exposure However:Ĭrypto had appreciated over the years and I didn’t want to incur capital gains taxes One way to lower payments would be to pay down a significant chunk of principal by selling some of my crypto holdings. (Admittedly, I signed up for this in order to bring down my rate in the first place.) Does this need to be going towards my debt right now? And does it need to be on the same day, every month?īecause I refinanced through a private lender, I wasn’t able to enjoy the student loan interest freeze, wouldn’t be able to qualify for loan forgiveness in the future, and missing a payment would damage my credit. While my CeFi loan sat at 3.5% APR, I still felt the pain of ~$1,700/month payments. I patted myself on the back for this remarkable accomplishment and assumed it couldn’t get much better than this… right? Society went as far as to categorize it as “good debt” – whatever that meant. Last year, when the Fed cranked up the money printer into overdrive and compressed interest rates, I refinanced once again to a heavenly 3.5% rate.Ĭoming from 8.8%, I felt much less pressure to pay off my loan quickly. I paid refinancing fees to the CeFi lenders at each step, which I deemed to be worth the cost. I was able to chip away at the debt and reduce the interest rate by growing my income and refinancing over time.