A subordinated loan is a specific type of credit that involves a relatively high risk for the lender. The subordinated loan mainly benefits the other lenders, since they can claim their money earlier when you can no longer meet your obligations. In that respect, the subordinated loan often has a relatively high interest rate, which makes it wise to handle it with care.
Keep in mind that a subordinated loan is different from a private loan. The latter relates to a credit from friends or family, where there is no intervention by the bank.
Rights of lenders
A subordinated loan says something about the rights of lenders when they want to claim their money. For example, suppose you have a regular credit of $ 5,000 and you also have a subordinated loan of $ 3,000. The moment you are no longer able to meet your obligations, the lender will receive the first right to reclaim the borrowed money for $ 5,000. If money remains after this, it is the turn of the provider of the subordinated loan, for which time this party cannot claim any money lent.
Mortgage gives the first right
Among other things, we come across the subordinated loan (in reverse form) when you take out a mortgage. In general, the mortgage lender takes the deed to claim the first right to repayment, which means that all other loans are automatically subordinated. In that regard, lenders always take a mortgage into account when they perform a BKR check and it shows that you have a mortgage. Of course, the home serves as collateral, which means that a subordinated loan compared to the mortgage is usually not a problem.
Subordinated loan with higher interest
Would you take out a subordinated loan compared to a consumer credit? Then that means an increased risk for the lender. This generally translates into a higher interest rate on the loan, making it often a relatively expensive form of borrowing. Take this into account and only take out the subordinated loan when you are specifically looking for it, or when you have no other choice.