Selling your assets means closing your position on that particular asset. Hence, if you are long on the asset, you would not be entitled to the potential upside value gain. By borrowing you are able to obtain liquidity (working capital) without selling your assets. Users are mainly borrowing for unexpected expenses, leveraging their holdings or for new investment opportunities.
Before borrowing you need to deposit any asset to be used as collateral. After this, simply head to the Borrow section and click on “Borrow” for the asset you want to borrow. Set the amount you need based on your available deposits that would be used as a collateral for the loan.
The maximum amount you can borrow depends on the value you have deposited and the available liquidity. For example, you can’t borrow an asset if there is not enough liquidity or if your health factor doesn’t allow you to. You can find every collateral available and its specific parameters for borrowing in the risk parameters section.
You repay your loan in the same asset you borrowed. For example, if you borrow 1 ETH you will pay back 1 ETH + interest accrued. If you want to pay back the loan based on USD price you can borrow any of the available stable coins as USDC, DAI, USDT, BUSD, etc.
The interest rate you pay for borrowing assets depends on the borrowing rate which is derived from the supply and demand ratio of the asset. You can find your current borrowing rate at any time in the Borrowings section of your dashboard.
The health factor is the numeric representation of the safety of your deposited assets against the borrowed assets and its underlying value. The higher the value is, the safer the state of your funds are against a liquidation scenario. If the health factor reaches 1, the liquidation of your deposits will be triggered. A Health Factor below 1 can get liquidated. For a HF=2, the collateral value VS borrow can reduce by 1 out of 2: 50%. The health factor depends on the liquidation threshold of your collateral against the value of your borrowed funds.
Depending on the value fluctuation of your deposits, the health factor will increase or decrease. If your health factor increases, it will improve your borrow position by making the liquidation threshold more unlikely to be reached. In the case that the value of your collateralised assets against the borrowed assets decreases instead, the health factor is also reduced, causing the risk of liquidation to increase.
There is no fixed time period to pay back the loan. As long as your position is safe, you can borrow for an undefined period. However, as time passes, the accrued interest will grow making your health factor decrease, which might result in your deposited assets becoming more likely to be liquidated.
In order to payback the loan you simply go to the Borrowings section of your dashboard and click on the repay button for the asset you borrowed and want to repay. Select the amount to pay back and confirm the transaction.
In order to avoid the reduction of your health factor leading to liquidation, you can repay the loan or deposit more assets in order to increase your health factor. Out of these two available options, repaying the loan would increase your health factor more.