# How Interest Rates Work Interest rates determine the cost of borrowing and play a significant role in the overall health of your BTC-backed loan. Understanding how rates behave helps you make more informed borrowing decisions. ### Why interest rates exist When you borrow against BTC, you pay interest to the lender in exchange for access to liquidity. The rate you pay is determined by the lender’s model, market conditions, and the availability of liquidity. ### What affects interest rates Interest rates can move for several reasons, including: * Borrowing demand: higher demand may increase rates. * Available liquidity: more supply may lower rates. * Market conditions: volatility or rapid inflows/outflows can affect utilization. * Lender parameters: each lender defines its own rules for adjusting rates. Rates are not static; they evolve based on how the lending market is behaving. ### Variable (Floating) interest rates A variable (or floating) rate adjusts over time. Most crypto-secured lenders use variable models because they react to changing market conditions. #### Variable rates may: * decrease when demand is low * increase when liquidity is scarce or utilization is high * update frequently depending on lender mechanisms Variable rates offer lower costs during favorable conditions but can rise unexpectedly. ### Fixed interest rates Some lenders offer fixed rates for loans. A fixed rate remains the same for the duration of the loan and does not change with market conditions. #### Fixed rates may: * provide predictability and easier planning * be higher than floating rates during stable market periods ### Why rate movement matters Changing interest rates can affect: * Total interest paid over the life of the loan * Loan-to-Value (LTV) ratio, since interest accrues * Liquidation risk, especially during periods of high volatility Monitoring your loan and understanding how rates behave is important during active borrowing. ### How Borrow presents interest rates Borrow: * shows each lender’s current rate before you take out a loan * displays your active rate and loan metrics in the dashboard * makes rate behavior visible without managing rates on your behalf This gives you clarity while keeping control in your hands. --- # Agent Instructions: Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter: ``` GET https://docs.satsterminal.com/borrow/interest-and-rates/how-interest-rates-work.md?ask= ``` The question should be specific, self-contained, and written in natural language. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.