Borrowing
Last updated
Last updated
Meridian Lend enables you to obtain liquidity without the need for selling your existing assets. This means that you can benefit from the potential upside of multiple investments at the same time. Users normally choose to borrow in order to leverage their holdings, cover unexpected costs, or for new investment opportunities.
Before borrowing you need to deposit an approved asset to be used as collateral (see here to find out more). The maximum amount you can borrow depends on your health factor (see below) and the available liquidity. Provided that these criteria have been met you can simply head to the Borrow section of the application and click on “Borrow” for the asset you want to borrow. Set the amount that you wish to borrow, select either stable or variable interest rate and confirm your transaction. Note that you can swap between a fixed or variable interest rate for your loan at any time and without penalty.
Your health factor helps to determine how much you can safely borrow without the risk of being liquidated. It represents the safety of your deposited assets that are available as collateral against the borrowed assets and their underlying value. The higher the value is, the safer the state of your funds are against a liquidation scenario. If the health factor goes below 1, your deposits are likely to be liquidated in order to pay back the lenders.
For example, if your health factor is 2, the value of your collateral will have to decrease by 50% relative to borrowed funds for your position to be at risk of liquidation. However, if the value of your collateral increases relative to your borrowed funds, your health factor increases, making the liquidation threshold less likely to be reached.
Each token has its own specific set of risk management parameters that govern how it is used as collateral and how it can be borrowed. These parameters are used to define the loan to value ratio (LTV) and liquidation thresholds for each asset. The protocol applies these parameters, along with the assets that you are using for collateral and the assets that you are borrowing, in order to establish your health factor. Details of the risk management parameters for each asset can be found here.
We recommend Meridian Lend users maintain proper risk management when borrowing. Make sure to monitor your health factor and keep it high to avoid liquidation. Keeping your health factor over 2, for example, gives you more of a margin to avoid liquidation.
The interest rate that you pay for borrowing assets is derived from the supply and demand ratio of the specific asset. If you have elected to use a variable interest rate then this rate changes dynamically over time. If you want to be more confident about the interest that you will pay then you can use a stable interest rate. Stable rates act as a fixed rate in the short term but can be re-balanced in response to changes in market conditions. The stable rate will only be rebalanced in the unlikely event that the reserve utilisation rate is over 95% and the rate being paid to lenders is less than 40% of the maximum variable interest rate. You can swap between stable and variable rates at any time and the current rates can be found on the Borrowings section of your dashboard.
You can repay your loans at any time by repaying the principal and the interest accrued. There is no fixed time period to pay back the loan provided that your health factor remains above 1. However, the longer that you have the loan, the more interest will accrue and this may cause your health factor to decrease. When you do choose to repay, your repayment is made in the same asset that you borrowed. For example, if you borrow 100 TLOS you will pay back 100 TLOS + interest accrued. You can also use your collateral to repay your loan. If partial repayment is made, the borrow balance may be non-zero and continue to accrue interest.
In order to repay a loan, you simply go to the Borrowings section of your dashboard and click on the repay button for the asset you want to repay. Select the amount to pay back and confirm the transaction.
