# Interest rate

The loan interest rate is an Annual Percentage Rate (APR) paid by the borrower for the period of the loan.

The `getInterestRates` function sets the interest rate for borrowing money, making it cheaper when there's a lot of money available and more expensive when funds are running low.

Interest rates are calculated for the borrowed amount (`loanAmount`). Where taking a loan of 1,000 ADA will have a lower interest rate than taking a loan of 100,000 ADA (if taken from the same pool).

The loan interest rate is fixed for every loan and does not change for as long as the loan exists.

### getInterestRates()

***

#### Parameters

* `loanAmount`: The amount to be loaned.
* `lentOut`: The total amount already loaned out by the system.
* `balance`: The total amount of funds in the system.

***

#### Constants

Constants are protocol-set values to ensure a fluent lending/borrowing experience.

* `optimalUtilizationBN`: Optimal rate at which the system should be loaning out funds.
* `baseInterestRateBN`: The minimum interest rate to be charged.
* `rslope1BN` and `rslope2BN`: Rates at which interest increases.

```
const optimalUtilizationRate = 45%
const baseInterestRate = 3%
const rslope1BN = 7.5%
const rslope2BN = 300%
```

***

#### Utilization Rate

* **Formula**: `(loanAmount + lentOut) / (balance + lentOut)`
* **Purpose**: It measures how much of the available balance is being loaned out.

***

#### Interest Rate Calculation

1. **If Utilization Rate ≤ Optimal Utilization Rate**
   * **Formula**: `baseInterestRateBN + (utilizationRateBN * rslope1BN)`
2. **If Utilization Rate > Optimal Utilization Rate**
   * **Formula**: A more complicated formula involving both `rslope1BN` and `rslope2BN` is used to calculate the interest rate.

***

```typescript
export function getInterestRates(
  interestParams: InterestParams,
  loanAmount: bigint,
  lentOut: bigint,
  balance: bigint,
): bigint {

  const optimalUtilizationBN = new BigNumber(Number(interestParams.optimalUtilization))
  const baseInterestRateBN = new BigNumber(Number(BigInt(interestParams.baseInterestRate) * 1000000n))
  const rslope1BN = new BigNumber(Number(interestParams.rslope1))
  const rslope2BN = new BigNumber(Number(interestParams.rslope2))
  const oneMillionBN = new BigNumber(1000000)
  const loanAmountBN = new BigNumber(Number(loanAmount))
  const lentOutBN = new BigNumber(Number(lentOut))
  const balanceBN = new BigNumber(Number(balance))

  const utilizationRateBN = new BigNumber(
    lentOutBN.plus(loanAmountBN).multipliedBy(oneMillionBN).dividedBy(balanceBN.plus(lentOutBN)),
  )

  if (utilizationRateBN.lte(optimalUtilizationBN)) {
    const utilizationCharge = utilizationRateBN.multipliedBy(rslope1BN)

    const interestRate = BigInt(Math.floor(baseInterestRateBN.plus(utilizationCharge).dividedBy(1000000).toNumber()))

    return interestRate
  } else {
    const lowCharge = rslope1BN.multipliedBy(optimalUtilizationBN)
    const highCharge = utilizationRateBN.minus(optimalUtilizationBN).multipliedBy(rslope2BN)

    return BigInt(Math.floor(Number(baseInterestRateBN.plus(lowCharge).plus(highCharge).dividedBy(1000000).toNumber())))
  }
}

```


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