Perpetual Subordinated Loan Definition

A perpetual subordinated loan is a type of junior debt that continues indefinitely and has no maturity date. Perpetual subordinated loans pay creditors a steady stream of interest forever. As the loan is perpetual, the principal is never repaid so the interest steam never ends. Essentially, the borrower pays interest as a fee for access to the money but never fully repays the principal. The interest rate is based on the borrower’s creditworthiness, as well as prevailing market interest rates.

As perpetual subordinated loans are a type of junior debt, they are relatively risky for the creditor. They are secondary to unsubordinated loans (senior loans), so if the borrower of a perpetual subordinated loan defaults, the creditor won’t get repaid until the borrower’s unsubordinated loans are repaid. Because of the increased risk associated with subordinated loans, they will have higher interest rates than unsubordinated loans. Creditors can use a present-value calculation to determine the present value of a future series of perpetual subordinated loan payments.

[Important: A perpetual subordinate loan pays the creditor a steady stream of interest forever because the borrower never repays the principal.]