> For the complete documentation index, see [llms.txt](https://arkslabs.gitbook.io/arks/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://arkslabs.gitbook.io/arks/how-arks-works/interest-rate-model.md).
# Interest Rate Model
The ARKS interest rate model is calibrated to manage liquidity risk and optimize utilization. The loan interest rate is related to the number of days of the loan, the utilization rate of the lending pool, and the down payment ratio.
The utilization rate of the lending pool is an indicator of the available funds in the pool. The interest rate model can manage liquidity risk by automatically incentivizing users:
When funds are available: the interest rate decreases as the utilization rate decreases to encourage borrowing. When funds are scarce: the interest rate increases as the utilization rate increases, encouraging users to increase their deposits to earn higher interest returns.
While the interest rate of lending pool does vary with the utilization rate of the fund pool, the interest rate at the time of loan application and throughout the loan repayment remains fixed.
The specific formula is as follows:
***I*** represents the annualized rate for users with a level of 1
***L*** represents the level coefficient, and the loan coefficient decreases as the user's level increases (from high to low:*LV6=0.75，LV5=0.80，LV4=0.85，LV3=0.90，LV2=0.95，LV1=1*)
***T*** represents the time chosen for the "buy now, pay later" mechanism, which can be one month, two months, three months, six months, or one year
***P*** represents the down payment ratio, which can be one-quarter, one-third, one-half, or three-quarters;
***R*** is the adjusted interest rate, and $U$ is the utilization rate of the fund pool.
**Conclusion:**
According to the above formula, the lower the down payment ratio, the higher the interest rate for loans with the same duration; the longer the loan period with the same down payment ratio, the higher the interest rate; and the more funds have been lent out from the lending pool, the higher the interest rate for loans with the same duration and down payment ratio.
For example, suppose the current project hopes for a utilization rate of 65% for the lending pool, with an adjusted interest rate of 3%. When the utilization rate reaches 82%, the adjusted interest rate is 8%, and when the utilization rate reaches 100%, the adjusted interest rate is 20%. The following chart shows the adjusted interest rates (R)
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