What is a subordinate loan?
A subordinate loan, also referred to as junior debt, is a loan that is secondary to the primary loan. This term is often used in describing real estate loans, although it can be used in other credit situations. The primary or first real estate loan also has the first lien or legal claim. If the market or bankruptcy is closed, the subordinate debt is less priority and is paid only after the primary lien has been fulfilled. Since the repayment of this type of loan is subject to its priority in relation to other debts, a subordinate loan for creditors is considered a high risk.
In order to understand how a subordinate loan works, it may be useful to consider loans in terms of evaluation. The highest priority of payment is the highest loan or primary loan. The subordinate loan is ranked after the primary debts in terms of repayment. This means that a creditor who produces a subordinate debt has a secondary entitlement to assets that can be seized or sold for repayment.
The position of a subordinate loan can be the most visible in terms of the starting situation. For example, if the debtor fails on a loan that is provided by real estate, the creditor may decide to exclude. In this case, the creditor has the right to withdraw money first. Then the holder of the subordinate loan gather from the money that remained after the repayment of the primary creditor. If there is no money to repay the secondary creditor, the subordinate loan may lead to a loss for the secondary creditor.
usually subordinate loans are provided at a higher interest rate than primary loans. This is due to the fact that the creditor takes a greater risk when providing this type of loan. In fact, these loans are often more difficult to secure than primary loans due to the higher risk that the creditor faces in the provision of subordinate loans.
Platni statement on priority debt and subordinatesThe chorus remains the same, even if bankruptcy occurs instead of closing the market. If the debtor's assets are liquidated in the framework of the bankruptcy proceedings, the priority debts are first paid. The subordinate loan holder then receives the payment after the priority debts are paid in full. This means that the subordinate debt holder may not receive all or no money owed.