What is a Loan Position?

The position on a given loan typically refers to the order in which a lender will get paid out from a particular borrower. The easiest and most concise example of this can be related with mortgages. A mortgage is going to be the first loan position on the home which is used as collateral for the loan. The second mortgage will be the second position on that same asset (the home). So, if anything were to happen to borrower’s ability to repay his debt obligatoins and lenders were not made whole, the owner of the first mortgage will get paid out first while the owner of the second mortgage will get paid out second. In this scenario whatever is left over (if anything) will go to the second mortgage holder.

Positions on Loans Come with Higher Risk the Further Out They Are

In the case of less scrupulous industries where multiples loans are given out to borrowers desperately seeking credit there could be a large number of positions outstanding for a particular borrower. This commonly occurs in the MCA (Merchant Cash Advance) industry where lenders will offer extremely high rates to borrowers but go out to 4th, 5th, 6th position of loans in order to get borrowers a larger amount of funding. These next rounds typically offer less in funder but they are a chance for the borrower to receive more total funding. This eventually turns into a vicious cycle, especially with MCA, where the borrower is essentially just treading water paying extremely high interest rates.

The Further Out the Position the Higher the Interest Rate

Although it’s not always the case, the further out the position lenders go with a particular loan application the worse the interest rate will typically be. Lenders will usually need to have some outsized return in order to grant borrowers extension of credit at this level. There’s typically a larger likelihood that applicants do not get repaid for these loans and due to this interest rates can tend to be quite high for borrowers. Although on the other hand most of the loans options are legally in grey areas since MCA advances have usurious interest rates. Most applicants are desperate and being taken advantage but they are also usually subprime borrowers which makes the situation a double whammy. In this scenario more borrowing doesn’t usually solve the problem.

Secured or Unsecured?

Position typically only refers to the order in which a particular lender gets paid in the event a borrower was to default. This doesn’t typically refer to anything else regarding securitization or collateralization. So, technically speaking you can have a unsecured loan that is a 4th position or a 5th position loan that is secured to property like a home. The two are not mutually exclusive of one another and have no bearing on the position of a given debt obligation.

Regardless of the position of your loan things always work out best when borrowers are able to repay back what they borrowed. Unfortunately, that doesn’t always occur, when that is the case borrowers have debt relief options available to them.