When you deal with loans and debts most of the time, terms such as senior debt and junior debt are certainly familiar. For those of you who don’t know what a junior debt is, we are going to discuss this type of loan in this article.

Junior debt is a phrase used to describe a subordinated debt. It is basically a debt with lower priority rating compared to other conventional debts; the conventional debts issued by financial institutions, on the other hand, are recognized as senior debts with higher priority ratings.

As the name suggests, junior debt comes with several differences compared to senior debts. For example, if the borrower goes bankrupt, junior debts don’t get settled until all primary obligations are settled. The junior debt lenders – or, in most cases, investors – will have to wait until all other primary obligations are fulfilled before they can claim their investments back.

Although junior debt is a form of loan, it is usually issued as a bond or a commercial paper depending on the term attached to the loan agreement. Before a company or individual can apply for a junior debt, it needs to provide proper collateral – usually against cash flow or existing loans. A proper subordination agreement must also be formulated.

For investors and lenders, junior debts can actually be highly beneficial. Since there are more risks to take on, it is quite natural that junior debts come with higher interest rate. This means you can earn higher return on investment using this particular high-yield investment option.

Let’s not forget that there are also junior debts with relatively short loan period. The shorter the term, the lower risk a junior debt has. If you are relatively new to private investing and you want to invest by giving junior debts, it is always best to start with shorter loan period.