What Is a Leveraged Loan?

Thomas Finke

Thomas Finke, the CEO and chairman of Barings, LLC, possesses more than three decades of banking and investment experience. Holding an MBA in finance from the Duke University Fuqua School of Business, Thomas (Tom) Finke is an advocate for the leveraged loan market.

Also known as syndicated loans or bank loans, leveraged loans are loans to individuals or companies that have large debts and credit ratings below investment grade. These individuals or companies are considered to be at a higher risk of default than average borrowers.

Because of this, leveraged loans are associated with a much higher interest rate than typical loans, which makes leveraged loans more expensive for borrowers. Further, many leveraged loans have a floating interest rate instead of a fixed rate, so the interest rate changes according to market conditions. Once a leveraged loan is set up, it may be syndicated, or sold to a different investor or bank, which reduces the risk to lending institutions.