# Loans

## Borrowing

* **Mechanism:** Users can borrow  using `$BREAD`as collateral.
* **Loan Terms:**
  * **Collateral Requirement:** Users can borrow up to `99%` of their `$BREAD'`s value in `$BERA` (`99%` Loan-to-Value Ratio)
  * **Duration:** Minimum `1` day, Maximum `365` days
  * **Interest:** Interest rates are calculated on a linear scale with an APR of `6.9%`. Interest is collected up front, upon initiation of a loan. 
    * There is a minimum interest fee to ensure that the burn fees cannot be bypassed by taking a 1 day loan and defaulting
    * Please visit [Interest Fees](/mechanics/interest-fees.md)for more detail
  * **Liquidation:** If a loan defaults, then the `$BREAD` collateral is burned. Since loans are over-collateralized, burning the collateral causes the ratio of `$BERA` per `$BREAD` to increase. `$BREAD` collateral from liquidated positions are burned collectively, every day, at `00:00 UTC`

{% hint style="info" %}
 **Important Note**: You can only have one active loan position at a time in BakerDAO. If you already have a Standard loan, you cannot create an automated looped position (and vice versa) until you close your existing position
{% endhint %}

<figure><img src="/files/dexG2XMzloZYwMau52ez" alt=""><figcaption></figcaption></figure>

\*Loans can taken with a `99%` LTV. Interest is paid upon initiation of the loan, and is deducted from the total borrowed amount. `65%` of fee increases $BERA backing, `15%` is used for liquidity bribes, and `20%` is retained by the treasury

{% hint style="success" %}
The maximum amount that can be taken as a loan is determined by the $BERA backing of $BREAD and the ratio between both assets, it is not dependent upon secondary market value. Therefore, loans cannot be liquidated by price movement, and loss of collateral is only possible if user does not pay back loan in time
{% endhint %}

## Liquidation example

* Assume there is `100` `$BREAD` tokens in circulation, and there `100` `$BERA` tokens backing them on the contract. The price of `1` `$BREAD` is `1` `$BERA`. All the `$BREAD` is owned by one user
* A user can take a loan that is `99%` of their `$BREAD` value. In this case, they use `100` `$BREAD` as collateral to borrow `99` `$BERA`, and specific a loan length when initiating the loan (must be between `1` and `365` days)
* The user fails to repay their loan on time, leading the position to be liquidated. `99.7%` of the collateral, or `99.7` `$BREAD`, is burned and the remaining `0.3%`, or `0.3` `$BREAD` is distributed to PoL bribes and treasury
* As the loan was `99%` LTV, the `1%` collateral premium as well as `65%` of interest fees are added to the `$BERA` backing of `$BREAD`, which leads to the exchange ratio between them increasing with more `$BERA` backing each circulating `$BREAD`


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