Borrowers can be liquidated if their LTV ratio exceeds the predefined Liquidation LTV, which varies by collateral. This is tracked via the borrower’s Health Factor, where a value of less than 1.00 would start triggering liquidation. Palomino Finance’s liquidation mechanism is similar to Aave’s, where up to a specific percentage (typically 50%–75%, depending on the asset) of a borrower's collateral may be seized and sold to repay part of the debt once the Liquidation LTV is breached.

Like on Aave, liquidations on Palomino Finance are permissionless and can be executed by any market participant. Liquidators repay a portion of the borrower's outstanding debt and, in return, receive a discounted portion of the collateral. The liquidation bonus and protocol fee vary by market and asset, and are designed to ensure strong economic incentives for maintaining solvency. Notably, liquidators can utilize Saga Dollar flash loans to to execute liquidations without upfront capital—further enhancing efficiency and responsiveness in volatile market conditions.

To avoid liquidation, borrowers can:

• Deposit additional collateral to increase their Health Factor
• Partially or fully repay their outstanding debt