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Debt repayment - Why and When?
This page presents different aspects of your debt management, most specifically when you should consider repaying it, but also why you should repay it.
Is this really a debt?
Technically speaking, yes. You owe MAI to the protocol, so it's a debt. However, you shouldn't really consider the debt on Mai Finance as a debt. Indeed, you deposit something of value (your crypto assets) and in exchange, Mai Finance allows you to borrow a stable coin. You don't need to pay any interests on the funds you borrowed, and when you want to get your assets back, you pay a very small fee of 0.5% of what you borrowed, which is paid directly on the collateral.
So basically, Mai Finance is your crypto pawn shop.
On the other hand, your deposited crypto can increase in value, which allows you to borrow more. Also, on Mai Finance, you can use other protocols like AAVE to make sure your deposited assets are at work and earn you yield while still being used as a collateral, and it won't have any impact of the amount or value of your debt, nor on its repayment.
Finally, as of mid-September 2021, the dev team of Mai Finance added incentives to loans, which would actually make borrowing MAI a negative interest loan (you get paid to borrow money).
Hence, by using Mai Finance and its vaults, you simply secure your assets, and only put at risk your borrowed money. Ideally, you would make some profits, or at least try to not totally lose your loan, which means that you should always be able to pay back your debt and get back your collateral.
Why should you repay your debt?
There is a single answer to this question: get back your collateral.
Indeed, Mai Finance does not charge any interest on your loans. This means that there is no growing amount of money that you need to pay back. You only repay what you borrowed, with the simple addition of the 0.5% repayment fee corresponding to 0.5% of what you borrowed.
As an example
- You deposit $1,000 worth of MATIC in the MATIC vault
- You borrow $200 worth of MAI and play with it
- Your investments generated $20 that you convert back to MAI
- You repay your $200 loan after 5 months
- You unlock $999 worth of MATIC (the 0.5% of $200 equals to $1 and is taken off your collateral)
There is also absolutely no pressure on the moment you need to repay your debt. It's not like the longer you wait, the more you owe. With Mai Finance, you do whatever you want with your borrowed MAI, and you pay back when you want. You can even pay back in pieces. If your borrowed money is generating a consistant revenue stream, you can use it to either re-invest, partially or totally repay your loan.
As an example
- You deposit $1,000 worth of MATIC in the MATIC vault
- You borrow $225 worth of MAI
- You convert your MAI into a IMX/ETH LP pair and deposit it on QuickSwap pool
- Your position, with an APR of 163.2%, is generating $1 every day
- You convert your gain into MAI and repay your debt, $1 every day
- After 225 days, your debt is fully repaid and your IMX/ETH can now generate pure revenue
Because of the 0% interest / no pay-back time limit, there's absolutely no need to repay your debt for whatever reason else than get back your collateral. And this is truly fantastic, because instead of repaying your debt, you could use your gains to increase your investments. And the best way to do it, of course, is to buy more crypto, secure it into the vault, and borrow more MAI.
When should you repay your debt?
There is a single answer to this question: when you want to sell your collateral.
In the paragraph above, we saw that there is absolutely 0 impact if you don't repay your debt "fast enough". Indeed, you could just never repay your debt and you would be in the exact same position as someone who just borrowed a few minutes before.
The only thing that would make you actually repay your debt is that you consider that the asset used as collateral is now reached a price at which you want to sell it, or if you need to sell your crypto assets for whatever reason. Only then is "the right time" to repay your debt.
On a separate note, you may also want to repay your debt if your asset used as collateral is losing value too quickly, and you don't want to be liquidated, because it would make you lose even more money. We will see on a separate article how you can repay your debt depending on the situation of your vault (it's health ratio), the market, and other factors.
Disclaimer
The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the rest of the community, nor the development team behind Mai Finance. It should not be taken as a financial advice or guidance of any kind.
Keep in mind that a strategy that works well at a given time may perform poorly (or make you lose money) at another time. Please stay informed, monitor the markets, keep an eye on your investments, and as always, do your own research.