Yes, you are right, it is hard to explain...

ALL gets sold to RUNE.

50% of that RUNE goes to the borrower (and can be swapped for whatever asset you want to borrow, the other 50% effectively goes into the LP via synthetic asset purchase (in the case of a BTC loan it would go into synthetic BTC which effectively is a position in the RUNE:BTC pool). That is my understanding of the system.