# Interest Rate Framework

RAAC utilizes a discounted interest rate model which tracks the US Prime Rate. Specifically, below the target rate, borrowers pay half of the US Prime Rate.

Above the utilization rate target, a penalty interest is introduced which scales linearly with the distance to the target utilization. This provides an incentive for borrowers to repay their loan and allows lenders to withdraw funds, ensuring liquidity

***

#### Borrow Rate

 The borrow rate ($$R\_b$$) is calculated as follows:

$$
R\_b​=R\_b^{target}​+max(u ​× (U - U\_T),0)
$$

> *with:*
>
> * $$R\_b$$*: borrow rate*
> * $$R\_b^{target}$$*: target borrow rate (½ US Prime Rate)*
> * $$U$$*: Utilization*
> * $$U\_T$$*: Target Utilization*
> * $$u$$*: utilization penalty factor*

#### Supply Rate

The supply APR ($$R\_s$$) is calculated from the borrow interest paid by borrowers, minus a reserve factor which constitutes a protocol fee.

$$
R\_s​=R\_b​ ​× U × (1-RF)
$$

> *with:*
>
> * $$R\_s$$*: supply rate*
> * $$R\_b$$*: borrow rate*
> * $$U$$*: Utilization*
> * $$RF$$*: Reserve Factor*

<figure><img src="/files/WDzBFVlToZN6S4BwzbLN" alt=""><figcaption></figcaption></figure>

{% columns %}
{% column valign="middle" %}
[Stability pool](/learn/production-suite/raaclend-or-rwa-tokenization-and-index/raac-lending-infrastructure/stability-pool.md) depositors may earn up to 80% of the rental income of the borrower’s collateral, whether REET NFTs or $iREET, as decided by $veRAAC holders via the secondary gauge.

Furthermore, idle crvUSD supply is deposited into Savings crvUSD (scrvUSD) on Curve to earn yield.
{% endcolumn %}

{% column valign="middle" %}
That gives the following total lending APR:

$$
R\_s​=R\_b​ ​× U × (1-RF)+\frac{I\_r\times U}{LTV}
$$

where

$$
I\_r​=\alpha\times RentalYieldAPR
$$

$$
LTV=\frac{Borrows}{CollateralValue}
$$

```latex
 \alpha: max percentage of rental income earmarked for distribution to lenders
```

{% endcolumn %}
{% endcolumns %}

## Parameters

Currently, the following parameters are implemented:

| Parameter                    | Value |
| ---------------------------- | ----- |
| Target Utilization           | 80%   |
| utilization penalty factor u | 4     |
| Reserve Factor               | 10%   |


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