Leveraged Loan
Candlefocus EditorIn a leveraged loan, the lender provides financing to the borrower that is based on the total amount of the borrower's debt, both existing and future. This creates a higher risk for the lender as the loan is partially covered by the borrower’s current debt. If the borrower defaults on the loan, the lender typically has a right to the borrower’s existing debt as collateral.
Leveraged loans are more expensive than traditional loans since they carry a higher risk of default. The terms of the loan usually have covenants and more restrictive clauses than a traditional loan. This helps reduce the lender’s risk, but can be prohibitively expensive for the borrower. As a result, borrowers will often try to negotiate more lenient terms in order to bring down the overall cost of the loan.
One risk that comes with leveraged loans is that if the borrower defaults, the lender takes on the borrower’s current debt. This means that if the borrower’s debt is very high, the lender may not be able to recoup the full investment, even after taking the borrower’s existing debt as collateral. As a result, some lenders may prefer to extend other forms of financing to borrowers with high levels of debt or poor credit history.
Leveraged loans provide an opportunity for companies or individuals with high levels of debt or poor credit to secure financing, but with increased risk and cost. As such, it is important for borrowers to assess the terms, rates and conditions of the loan before committing, and to negotiate loan terms that are affordable and manageable.