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Exit Early

A borrower can exit their position early before maturity. There are three options:

  • Repay at par by paying the full maturity value (principal plus full-term interest) directly. This is always available and does not depend on market liquidity.
  • Exit at the current market rate by lending against the position at the prevailing rate, matching an existing sell (borrow) offer. This requires sufficient market liquidity and executes immediately.
  • Relist at a preferred rate by creating a buy (lend) limit order. The position remains open until another user fills the order at that rate, or until the borrower cancels it.

The market-rate and relist options work by taking an offsetting position that cancels the original one, so they depend on a matching counterparty being available.

Exiting through the market costs less than par

Exiting through the market costs less than repaying at par. You lend against the position at the prevailing rate, so you need less principal today than the full maturity value to offset the debt. The higher the rate, the larger the saving.

Example​

A user borrows 1,000 USDC at 5% APR for 1 month. The interest owed over the term is:

1,000×5%×112=4.17 USDC1{,}000 \times 5\% \times \frac{1}{12} = 4.17 \text{ USDC}

To repay at par, the user pays the full maturity value of 1,004.17 USDC (principal plus interest) to net off the debt. This is always available and does not depend on market liquidity.

To exit through the market instead, the user lends against the position, transferring it to another borrower. If there is an outstanding sell (borrow) offer at 5% APR for 1 month, the user can lend 1,000 USDC against it to exit immediately, without paying interest upfront. Note that if the rate at which the user exits differs from the rate at which they initially entered, they will have a gain or a loss due to the difference in interest rates.

Impact of rates on the value of a position​

When closing a borrow position before maturity, the user may realize a mark-to-market gain or loss depending on how interest rates have moved since the position was initiated.

  • If rates have risen and the user entered at a lower rate than the rate at which they exit, they will realize a gain.
  • If rates have fallen and the user entered at a higher rate than the rate at which they exit, they will realize a loss.

Example: rates increase from 5% to 7%​

A user borrowed 1,000 USDC at 5% APR for 1 month, owing 1,004.17 USDC at maturity.

To exit early at the current market rate of 7%, the user needs to lend enough USDC to cover the 1,004.17 USDC debt at maturity. At 7% APR, the amount needed to lend today is:

1,004.171+7%12=998.34 USDC\frac{1{,}004.17}{1 + \frac{7\%}{12}} = 998.34 \text{ USDC}

The user initially borrowed 1,000 USDC and only needs to lend 998.34 USDC to exit, resulting in a gain of 1.66 USDC (1,000 - 998.34). This gain is due to exiting at a higher rate (7%) than the rate at which they entered (5%).

Example: rates decrease from 5% to 3%​

A user borrowed 1,000 USDC at 5% APR for 1 month, owing 1,004.17 USDC at maturity.

To exit early at the current market rate of 3%, the user needs to lend enough USDC to cover the 1,004.17 USDC debt at maturity. At 3% APR, the amount needed to lend today is:

1,004.171+3%12=1,001.67 USDC\frac{1{,}004.17}{1 + \frac{3\%}{12}} = 1{,}001.67 \text{ USDC}

The user initially borrowed 1,000 USDC but needs to lend 1,001.67 USDC to exit, resulting in a loss of 1.67 USDC (1,001.67 - 1,000). This loss is due to exiting at a lower rate (3%) than the rate at which they entered (5%).