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 borrowing mainly for unexpected expenses, leveraging their holdings or for new investment opportunities.
Before borrowing you need to deposit any asset to be used as collateral (check out our Depositing & Earning FAQ section for more info). 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 borrowings. Select either stable or variable rate and confirm your transaction. You can always change your rate afterwards as many times as you prefer.
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 our risk parameters section.
Stable rates act as a fixed rate in the short-term, but can be re-balanced in the long-term in response to changes in market conditions. Variable rate is the rate based on the offer and demand in Aave. The stable rate, as its name indicates, will remain pretty stable and its the best option to plan the interest amount to be paid. The variable rate will change over the time and could be more beneficial based on the status. You can switch between one or another rate at any time through your dashboard.
Stable rate rebalance is expected to be unlikely, but will happen if the average borrow rate is lower than 25% APY and the utilization rate is over 95%. You can find more information in our latest post about the new stable rate strategy.
To switch your interest rate between stable and variable rate, simply browse to your dashboard and click on the “APR Type” switch button for the asset you wish to apply the rate change.
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. Moreover, the interest rate of a variable rate changes constantly, whereas stable interest rate provides stability for the interest rates. 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 safeness 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. The health factor depends on the liquidation threshold of your collateral against the value of your borrowed funds. You can find all of the collateral parameters in the risk parameters section.
If you would like to know more technical details about the health factor calculation, you can find those here.
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 collateralized 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 of 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.