What is Subordinated Debt?
Subordinated debt is debt that is ranked lower than primary debt. For example, in a bankruptcy, the court will repay the primary debt first and use what is left over to pay subordinate debt. All of your debt is ranked according to priority, and the court goes down the list until the cash runs out. Not every lender will recoup their capital and that is why second, third and fourth loans are riskier than first mortgages.
What it Means for Lenders
If you are the lender, you need to look out for your best-interest to ensure you get paid if a bankruptcy occurs. Usually bank loans are first in line. Private loans tend to get the last priority. If you are extending a private loan, formalize a contract with the help of an attorney. Verbal agreements, memorandums or non-notarized contracts will not likely hold up in court against formal bank debt notices.
Student Loans
- 3 Factors that Contribute to Fluctuating Interest Rates on Student Loans
- What are the Consequences of Defaulting on a Federal Student Loan?
- What Happens when You Default on a Private Student Loan?
- Federal vs. Private: Comparing Student Loan Interest Rate
- Can You Get a Private Student Loan with No Cosigner?
