> ## Documentation Index
> Fetch the complete documentation index at: https://docs.credprotocol.com/llms.txt
> Use this file to discover all available pages before exploring further.

# Under-Collateralized Lending

> Unlock true leverage for creditworthy borrowers with less than 100% collateral

In traditional finance, consumer lending is a **\$4.5 trillion market** that's enabled by credit reporting bureaus and credit scoring agencies. In DeFi, accounts are assumed to be "unscorable," requiring lenders to over-collateralize loans—limiting access and utility.

Cred Protocol quantifies on-chain lending risk at scale by building one of the first decentralized credit scores. We're on a mission to expand access to DeFi lending to regular people and underserved communities, helping them access financial resources that make a meaningful difference to their lives.

<Info>
  **New to credit-based lending?** Start with [Capital-Efficient Lending](/use-cases/capital-efficient-lending), which covers reducing collateral requirements while remaining over-collateralized (100%+). This page covers the next step: lending with **less than 100% collateral**.
</Info>

***

## What is Under-Collateralized Lending?

Under-collateralized lending allows borrowers to access more capital than they deposit as collateral. This is how most traditional consumer lending works—and it's the next frontier for DeFi.

<CardGroup cols={2}>
  <Card title="Over-Collateralized" icon="lock">
    **Collateral > Loan**

    Deposit $150 to borrow $100. Safe but capital inefficient.
  </Card>

  <Card title="Under-Collateralized" icon="unlock">
    **Collateral \< Loan**

    Deposit $50 to borrow $100. Requires trust—enabled by credit scoring.
  </Card>
</CardGroup>

| Approach             | Collateral Ratio | Example                     | Risk Level                               |
| -------------------- | ---------------- | --------------------------- | ---------------------------------------- |
| Over-collateralized  | 110-150%         | $150 collateral → $100 loan | Low (trustless)                          |
| Fully collateralized | 100%             | $100 collateral → $100 loan | Low                                      |
| Under-collateralized | 50-99%           | $50 collateral → $100 loan  | Medium (requires credit assessment)      |
| Unsecured            | 0%               | $0 collateral → $100 loan   | High (requires strong identity + credit) |

***

## The Market Opportunity

<Steps>
  <Step title="Institutional Under-Collateralized Lending">
    **Happening today** through protocols such as Maple Finance and TrueFi. However, loans are approved by governance token-holders, so risk underwriting is fundamentally "human powered" and limited in scale.
  </Step>

  <Step title="Consumer Lending Gap">
    Consumer lending in traditional finance is a \*\*$4.5T market**—almost three times larger than the $1.5T institutional lending market. However, DeFi-powered under-collateralized consumer loans aren't happening yet.
  </Step>

  <Step title="The Missing Piece">
    To enable consumer lending, we need to **quantify risk at scale**, which requires an algorithmic approach: a credit score. That's what we're building at Cred Protocol.
  </Step>
</Steps>

***

## How Cred Protocol Enables Under-Collateralized Lending

### Risk Quantification at Scale

```javascript theme={null}
async function assessLoanRisk(borrowerAddress, requestedAmount) {
  // Get comprehensive credit data
  const [scoreResponse, reportResponse] = await Promise.all([
    fetch(`https://api.credprotocol.com/api/v2/score/address/${borrowerAddress}?include_factors=true`, {
      headers: { 'Authorization': `Bearer ${API_KEY}` }
    }),
    fetch(`https://api.credprotocol.com/api/v2/report/address/${borrowerAddress}`, {
      headers: { 'Authorization': `Bearer ${API_KEY}` }
    })
  ]);

  const { score, range, factors } = await scoreResponse.json();
  const { report } = await reportResponse.json();

  // Assess borrower profile
  const riskAssessment = {
    creditScore: score,
    creditRange: range,

    // Historical behavior
    hasLiquidations: report.summary.count_liquidations > 0,
    hasDefaults: report.summary.count_defaults > 0,
    repaymentCount: report.summary.count_repayments,

    // Financial position
    netWorth: report.summary.net_worth_usd,
    totalAssets: report.summary.total_asset_usd,
    currentDebt: report.summary.total_debt_usd,

    // Identity verification
    identityAttestations: report.summary.list_identity_attestations,
    isVerified: report.summary.count_identity_attestations > 0,

    // Calculate risk metrics
    debtToAssetRatio: report.summary.total_debt_usd / report.summary.total_asset_usd,
    requestedToNetWorth: requestedAmount / report.summary.net_worth_usd,
  };

  return riskAssessment;
}
```

### Dynamic Collateral Requirements

Under-collateralized lending requires collateral ratios **below 100%**. Only the most creditworthy borrowers with verified identity qualify:

```javascript theme={null}
function calculateCollateralRequirement(score, loanAmount, riskAssessment) {
  // Base collateral ratios by credit tier (under-collateralized product)
  // Note: Only excellent/very_good tiers qualify for under-collateralized loans
  const baseRatios = {
    excellent: 0.50,   // 50% collateral (2x leverage)
    very_good: 0.75,   // 75% collateral (1.33x leverage)
    good: 0.90,        // 90% collateral (1.1x leverage) - barely under-collateralized
    fair: null,        // Not eligible for under-collateralized
    low: null,         // Not eligible for under-collateralized
  };

  // Check eligibility
  if (!baseRatios[riskAssessment.creditRange]) {
    return {
      eligible: false,
      reason: 'Credit score too low for under-collateralized lending',
      suggestion: 'See Capital-Efficient Lending for over-collateralized options with reduced requirements',
      alternativeProduct: 'capital-efficient',
    };
  }

  // Identity verification required for under-collateralized loans
  if (!riskAssessment.isVerified) {
    return {
      eligible: false,
      reason: 'Identity verification required for under-collateralized loans',
      suggestion: 'Add ENS, Gitcoin Passport, or other identity attestations',
    };
  }

  let collateralRatio = baseRatios[riskAssessment.creditRange];

  // Adjust for risk factors
  if (riskAssessment.hasLiquidations) collateralRatio += 0.15;
  if (riskAssessment.hasDefaults) return { eligible: false, reason: 'Previous defaults disqualify from under-collateralized lending' };

  // Adjust for loan size relative to net worth
  if (riskAssessment.requestedToNetWorth > 0.5) collateralRatio += 0.10;

  // Reward strong repayment history
  if (riskAssessment.repaymentCount >= 10) collateralRatio -= 0.05;

  // Ensure minimum collateral (never below 30%)
  collateralRatio = Math.max(0.30, collateralRatio);

  return {
    eligible: true,
    ratio: collateralRatio,
    requiredCollateral: loanAmount * collateralRatio,
    leverage: 1 / collateralRatio,
  };
}
```

***

## Loan Eligibility Framework

### Under-Collateralized Tiers

Under-collateralized lending is a premium product requiring excellent credit **and** verified identity:

| Tier      | Min Score | Collateral | Max Leverage | Identity Required |
| --------- | --------- | ---------- | ------------ | ----------------- |
| Excellent | 920+      | 50%        | 2.0x         | Yes               |
| Very Good | 840+      | 75%        | 1.33x        | Yes               |
| Good      | 750+      | 90%        | 1.1x         | Yes               |

<Warning>
  Users with scores below 750, previous defaults, or no identity verification should use [Capital-Efficient Lending](/use-cases/capital-efficient-lending) instead, which offers reduced collateral requirements while remaining over-collateralized.
</Warning>

### Tiered Access Model

```javascript theme={null}
function determineLoanEligibility(riskAssessment) {
  const { creditScore, netWorth, isVerified, hasDefaults } = riskAssessment;

  // Disqualifying factors for under-collateralized lending
  if (hasDefaults) {
    return {
      eligible: false,
      reason: 'Previous defaults disqualify from under-collateralized lending',
      suggestion: 'Build positive repayment history, then try Capital-Efficient Lending first',
      alternativeProduct: 'capital-efficient',
    };
  }

  if (!isVerified) {
    return {
      eligible: false,
      reason: 'Identity verification required for under-collateralized loans',
      suggestion: 'Add ENS, Gitcoin Passport, or other identity attestations',
    };
  }

  // Under-collateralized tier definitions (all require identity verification)
  const tiers = [
    {
      name: 'Excellent',
      minScore: 920,
      maxLoanToNetWorth: 2.0,    // Can borrow 2x net worth
      collateralRatio: 0.50,     // 50% collateral
      leverage: 2.0,
      features: ['Lowest collateral', 'Highest limits', 'Best rates'],
    },
    {
      name: 'Very Good',
      minScore: 840,
      maxLoanToNetWorth: 1.5,
      collateralRatio: 0.75,     // 75% collateral
      leverage: 1.33,
      features: ['Low collateral', 'High limits', 'Competitive rates'],
    },
    {
      name: 'Good',
      minScore: 750,
      maxLoanToNetWorth: 1.2,
      collateralRatio: 0.90,     // 90% collateral
      leverage: 1.1,
      features: ['Reduced collateral', 'Standard limits'],
    },
  ];

  // Find eligible tier
  for (const tier of tiers) {
    if (creditScore >= tier.minScore) {
      return {
        eligible: true,
        product: 'under-collateralized',
        tier: tier.name,
        maxLoan: netWorth * tier.maxLoanToNetWorth,
        collateralRatio: tier.collateralRatio,
        leverage: tier.leverage,
        features: tier.features,
      };
    }
  }

  // Not eligible for under-collateralized, suggest alternative
  return {
    eligible: false,
    reason: 'Credit score below 750 required for under-collateralized lending',
    suggestion: 'Try Capital-Efficient Lending for better terms than standard DeFi',
    alternativeProduct: 'capital-efficient',
    currentScore: creditScore,
    requiredScore: 750,
  };
}
```

***

## Risk Mitigation Strategies

### For Lenders

<AccordionGroup>
  <Accordion title="Diversified Loan Pools">
    Spread risk across many borrowers with varying credit profiles. A well-diversified pool can absorb individual defaults while remaining profitable.
  </Accordion>

  <Accordion title="Progressive Trust Building">
    Start borrowers with small limits and increase over time based on repayment behavior. This limits exposure while building track record.
  </Accordion>

  <Accordion title="Identity Requirements">
    Require identity attestations (ENS, Gitcoin Passport) for under-collateralized loans. This adds accountability and reduces sybil attacks.
  </Accordion>

  <Accordion title="Real-Time Monitoring">
    Monitor borrower positions and credit scores continuously. Early warning systems can trigger margin calls or reduced limits before defaults occur.
  </Accordion>
</AccordionGroup>

### Implementation Example

```javascript theme={null}
async function monitorLoanHealth(loanId) {
  const loan = await getLoan(loanId);
  const currentScore = await getCredScore(loan.borrower);
  const currentReport = await getCredReport(loan.borrower);

  const healthMetrics = {
    // Score degradation
    scoreChange: currentScore.score - loan.originalScore,
    scoreDegraded: currentScore.score < loan.originalScore - 50,

    // Position health
    currentCollateralRatio: loan.collateralValue / loan.outstandingAmount,
    belowMinimum: loan.collateralValue / loan.outstandingAmount < loan.requiredRatio,

    // Borrower financial health
    netWorthChange: currentReport.summary.net_worth_usd - loan.originalNetWorth,
    debtIncreased: currentReport.summary.total_debt_usd > loan.originalDebt * 1.5,
  };

  // Trigger alerts or actions
  if (healthMetrics.scoreDegraded || healthMetrics.belowMinimum) {
    await triggerMarginCall(loanId, healthMetrics);
  }

  return healthMetrics;
}
```

***

## The Vision: Democratizing Credit

<Info>
  Under-collateralized lending isn't just about capital efficiency—it's about **financial inclusion**. Billions of people worldwide lack access to credit because they don't have traditional credit history. On-chain activity can provide an alternative path to creditworthiness.
</Info>

### Who Benefits

| User Type             | Current Situation          | With Under-Collateralized Lending                |
| --------------------- | -------------------------- | ------------------------------------------------ |
| DeFi power users      | Lock up 150%+ collateral   | Access 2x+ leverage with proven track record     |
| Emerging market users | No access to credit        | Build creditworthiness through on-chain activity |
| Small businesses      | Limited capital efficiency | Grow faster with working capital loans           |
| DAO contributors      | Reputation but no credit   | Leverage on-chain reputation for loans           |

***

## Getting Started

<CardGroup cols={2}>
  <Card title="Capital-Efficient Lending" icon="scale-balanced" href="/use-cases/capital-efficient-lending">
    Start here: reduced collateral while staying over-collateralized
  </Card>

  <Card title="Get Credit Score" icon="chart-line" href="/api-reference/score/get-score">
    Assess borrower creditworthiness
  </Card>

  <Card title="Get Credit Report" icon="file-lines" href="/api-reference/report/get-report">
    Deep dive into borrower financial profile
  </Card>

  <Card title="Contact Us" icon="envelope" href="https://discord.gg/MtDHUX9mD6">
    Discuss integration for your lending protocol
  </Card>
</CardGroup>