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

# Loan Mechanics

> How fleet operator loans are structured, calculated, and repaid — the math behind amortised vehicle financing.

## Loan Structure

Every Fleets facility is a **fully amortising USD loan** secured by a vehicle lien held by the licensed Nigerian SPV. The operator contributes between 20% and 40% of the vehicle value as equity; the protocol funds the remainder. This results in a loan-to-value ratio of 60–80%.

```
Vehicle Cost = Operator Equity (20–40%) + Fleets Loan (60–80%)
```

At default, the only recoverable asset is the vehicle itself. There is no additional collateral.

**Available loan terms:** 12, 24, or 36 months\
**APR range:** 15–25%, fixed at drawdown

## The Amortisation Formula

Every loan uses the standard annuity (PMT) formula to compute a fixed monthly payment:

```
PMT = P × r / (1 − (1 + r)^(−n))
```

| Variable | Description                                               |
| -------- | --------------------------------------------------------- |
| **PMT**  | Fixed monthly payment — constant for the entire loan term |
| **P**    | Original principal (the Fleets loan amount)               |
| **r**    | Monthly interest rate = APR / 12                          |
| **n**    | Total monthly payments (loan term in months)              |

This is the same formula used by every bank, mortgage lender, and auto finance company worldwide.

## How Interest and Principal Work

Although the monthly payment is constant, the split between interest and principal shifts each month. Interest is calculated on the **remaining balance**, which decreases after every payment:

```
Interest_t   = Balance_(t-1) × r
Principal_t  = PMT − Interest_t
Balance_t    = Balance_(t-1) − Principal_t
```

For the protocol's pool accounting, loan income is modelled as a fixed monthly interest contribution. This ensures predictable pool growth forecasting across the loan term.

## Worked Example: `$80,000` Loan at 22% APR, 36 Months

```
PMT = ($80,000 × 0.22/12) / (1 − (1 + 0.22/12)^−36)
    = $1,466.67 / 0.48387
    = $3,031.34 / month
```

| Month | Interest    | Principal   | Balance      |
| ----- | ----------- | ----------- | ------------ |
| 1     | `$1,466.67` | `$1,564.67` | `$78,435.33` |
| 6     | `$1,317.16` | `$1,714.18` | `$70,131.04` |
| 12    | `$1,145.64` | `$1,885.70` | `$60,603.74` |
| 24    | `$741.00`   | `$2,290.34` | `$38,128.17` |
| 36    | `$54.62`    | `$2,976.72` | `$0.00`      |

Total interest paid over 36 months: `$29,128.24`

## How Repayments Are Routed

When a repayment arrives in the pool, the full payment is converted to yield-bearing tokens and enters the pool. The protocol accounts for the payment as follows:

```
Monthly Payment = Interest Portion + Principal Portion
     │                   │
     │                   └──► Reduces outstanding loan balance
     │                        (tops up Liquidity Reserve first if below 20%)
     └──► Flows through yield waterfall
          ├── 10% → Protocol Treasury (minted as FYC)
          ├──  5% → Insurance Fund (minted as FYC)
          └── 85% → FYC and FFC holders (via sliding cap)
```

Only the interest portion increases pool value. The principal portion reduces the outstanding loan balance, returning that capital to the pool's yield-bearing token holdings.

## Payment Schedule

All payment due dates derive from `disbursement_ts` — the timestamp of the actual USDC transfer to the operator via the SPV:

```
Payment_due[n] = disbursement_ts + n × 2,592,000 seconds  (n = 1, 2, 3...)
```

This is important: `disbursement_ts` is the clock anchor for all payment dates, not the loan origination date.

## Grace Period and Default

If an operator misses a payment:

| Day           | State             | Action                                                                                                      |
| ------------- | ----------------- | ----------------------------------------------------------------------------------------------------------- |
| Day 1         | **Repayment due** | SPV expects repayment. USDC credited to pool by end of day.                                                 |
| Day 2         | **Delinquent**    | Grace period begins. Penalty interest starts accruing. SPV contacts operator.                               |
| Days 2–30     | **Delinquent**    | Penalty applies at APR × 1.25 on the outstanding balance                                                    |
| Day 30, 23:59 | **Defaulted**     | Automatic state transition. SPV executes vehicle lien. No exceptions.                                       |
| Day 31+       | **Recovery**      | Default waterfall. See [Yield Model — Default Waterfall](/protocol-overview/yield-model#default-waterfall). |

### Penalty Interest

Penalty interest follows the same amortised structure as the regular loan, but with a 1.25x multiplier applied to the interest rate. This keeps penalties bounded — they cannot exceed the normal repayment amount scaled by 1.25.

For a `$50,000` loan at 25% APR:

```
Penalty rate = 25% × 1.25 = 31.25%
Monthly penalty interest = $50,000 × (31.25% / 12) ≈ $1,302
```

If an operator cures within the grace period, they owe their normal repayment plus the accrued penalty interest. If not cured, the vehicle lien is executed.

Recovered penalty income — if any — is credited to the pool and benefits all LP token holders.

<Info>
  Multiple concurrent facilities can be active simultaneously. Total loan interest each period is the sum across all active loans. Each loan is tracked independently in its own on-chain account.
</Info>

<Note>
  Ready to deposit? See [Getting Started](/depositors/getting-started) for a step-by-step depositor guide.
</Note>