# Risks for Lenders

> Targets are illustrations from a model, not promises. Your actual return depends on markets.

Canonical: https://spout.finance/docs/what-lenders-should-know/

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| Risk | What it means | How it is managed |
| --- | --- | --- |
| Tranche risk | Junior absorbs losses before Senior; Junior's balance can fall | Senior is reached only after all of Junior, and for liquidation losses after the Insurance Fund too |
| Bad debt | A liquidation after a sharp gap may not cover a loan | Loans start at 50% LTV or less; partial liquidations; penalties to the Insurance Fund; the Insurance Fund absorbs bad debt first |
| Strategy | Premium can fall short of the targets for long stretches, and a cycle can settle below what was accrued | Strikes out of the money; covered calls only; adjustments spread over 7 days; Spout absorbs any contract below zero |
| No guaranteed income | Senior's 7% is a priority, not a guarantee; Junior can earn nothing in weak periods | Choose the tranche that matches your needs |
| Liquidity | When the reserve runs low, withdrawals may wait in the queue; Junior needs 45 days notice | **85%** utilization cap; 15% reserve target; claim resale |
| Exit costs | A 0.20% fee applies to every withdrawal, and an instant Senior withdrawal can carry a haircut of up to 3% | Use the queue to avoid the haircut |
| USDC | Your deposit carries the risks of USDC itself, such as issuer and peg risk | Same as holding USDC anywhere |
| Counterparties | Calls trade through Spout's brokerage account and clear through the options clearing house; collateral depends on its issuers and on that brokerage account | Approved issuers only; reconciliation of every cycle |
| Smart contracts and operations | A flaw or operational error could cause loss | Audits, once complete; governance multisig; halts for human review |

Targets are illustrations from a model, not promises. Your actual return depends on markets.