Secured, subordinated, mezzanine or unsecured: who gets repaid first when a borrower defaults?

- Secured loans are backed by collateral such as real estate or equipment, which can be seized and sold if the borrower defaults. Lower risk, usually a lower rate.
- Subordinated (junior) loans rank below senior debt but above equity. They pay higher rates for more credit risk.
- Mezzanine loans are a hybrid of debt and equity, sometimes with warrants or options. In a default they are repaid after senior lenders.
- Unsecured loans have no collateral and depend on the borrower's ability to repay. Higher rates, higher risk.
In a default, money recovered goes first to the secured lenders from the collateral, and whatever remains flows down to subordinated, then mezzanine, then unsecured lenders. A higher rate is usually the price of standing further back in that line. Note that what collateral fetches in a quick sale can be far below its book value. Capital is at risk: crowdfunding investments are not covered by deposit guarantee schemes, can lose part or all of their value, and may be hard to sell before the end of their term.