What Is A Subordinated Loan?

Subordinated loans are loans that are paid after a first lien. The term can also refer to subordinated debt, subordinated bonds, or junior debt. In short, a subordinated lien is a lower priority debt, in the event of liquidation or bankruptcy. The lien will be paid according to an established hierarchy.

The more important debts, or first liens, will be paid first, and if there are funds available, the subordinated loan will be paid. If there is no money available, the money is never repaid to a lender. Because these loans have a higher risk associated with them, they have higher interest rates.

These loans are usually available through shareholders and parent companies, not through private lenders and banking institutions and can be used to demonstrate support from a parent company, or to boost the credit rating of the business. More specific terms of a subordinated loan can be found in the loan agreement that is signed by both parties.