Payday Loan Consolidation: settlement and issue of a convertible and subordinated loan


Let’s see how the loan consolidation works, with everything you need to know about it. The characteristics of this form of financing and the regulation that regulates the issue and repayment of the sum loaned by investors. Finally we will see in particular how convertible and subordinated loans work, with the relative possible gains and risks.

Payday Loan Consolidation: what it is, risks and regulation

The consolidation loan is a very particular financial product. Do not be fooled by the name, because it is not a solution aimed at those who are looking for funding, but is aimed at all those who are interested in investing part of their savings. In fact, bonds are products that can be issued by a public limited company or by a public body, in order to obtain from investors a certain liquidity that they need. Anyone can decide to invest in this way, buying one or more packs of bonds, from which then you can get a profit. This is a form of investment that is usually not particularly risky, although as we will see it is good to pay attention to the type of bond that you decide to underwrite. When a company issues bonds, a certain interest rate and an expiration date are established, in which the sum of money advanced by the investor will be repaid. One of the advantages of bond loans is to allow anyone to invest their savings according to their financial resources. The financing that the company needs is in fact divided into fractions, the bonds in fact, which each have a certain value. Obviously based on how many bonds you buy you will get a proportional gain.

When an institution issues bonds it also establishes a regulation, which defines the methods of payment of interest and final repayment. Usually the interest is paid to investors according to a certain periodicity. The interests that the company pays to those who have purchased the bonds are called coupons, which can be paid for example on a quarterly, half-yearly or annual basis, based precisely on what is defined in the regulation. There are also bonds that do not provide for the payment of periodic interest, and in this case we are talking about “zero coupon” bonds. The main aspect to consider when buying a bond is obviously its price. This varies according to the fluctuations of the financial markets, and it is therefore very important to keep an eye on past trends to assess whether it is a cost-effective investment or whether it is better to choose a different financial product. Moreover, when buying one or more bond packages, the aspect of the interest rate is decisive. Fixed rate and floating rate bonds are available on the market. As with any form of financing, there are positive aspects and negative aspects for both types that we can choose from. In particular, the fixed rate protects from any negative movements in the interest rate of the markets, since in any case it will remain constant. On the other hand, there is the risk of a substantial loss of value of a fixed rate bond if the level of interest rates increases.

Bond loans are therefore products that can represent excellent earning opportunities from our savings, but which also do not hide risks. In general it is good to remember that in order to have particularly high profits from an investment it is necessary to expose oneself to risks. The profit that can be obtained from the purchase of the bonds is in fact closely linked to the risk of the same. First of all, the legal entity issuing the debenture is decisive. As we said these can be issued by a public limited company, but also by a state. Considering that the bankruptcy of the legal entity that issued the bonds would result in a loss of invested capital, it is obvious that an obligation issued by the State will have lower interest rates but also much lower risks than those of an obligation issued by a company which has a greater risk of failure. Obviously in this sense also the duration plays a fundamental role. The bonds with a longer duration are certainly more risky and therefore are only attractive if they provide particularly favorable conditions. Finally, the so-called liquidity risk is also very important, linked to the ease with which a bond can be sold. In this sense, therefore, listed securities are preferable to those not listed, given that at any time we will have the opportunity to sell them even before the deadline without recording losses.

Convertible and subordinated bonds: differences, issuance and repayment

We have therefore seen how the bond loan works in general and how the repayment of the sum of money invested is regulated. This is the most common type of bond, but it is not the only one that can be issued by a company or a public body.

Convertible payday loans

Another form of bond loan is the convertible one. What is it? Quite simply, the bonds that we can acquire have the same characteristics that we have seen previously, with the difference that on the maturity date of the obligation this can be converted precisely into securities of other species and which obviously have the same value. Usually bonds of this type can be converted into shares, which can be an opportunity to increase the value of our stock. The convertible bonds may be exchanged for shares of the same company that issued them, or with shares of another company, and this is defined at the time of the issue as well as the relative conversion rate. In this sense we can therefore distinguish two different types of convertible bonds: in direct mode, we will have the possibility of converting the obligation into an action of the company that issued it, while in indirect mode we can convert the obligation into shares of a company other than the issuer.

Buying a convertible bond can therefore be convenient for anyone interested in investing a certain capital from which to make a good profit over the long term. In particular, by converting the obligation into action, one can participate in the increase in the price of the share. This is the reason why the general characteristic of the conversion rate is to be convenient only if the increase in the value of the action is particularly high. For this reason, usually because the conversion is convenient, it must pass a short period and therefore we recommend this form of investment only to those who do not need to resort to the amount invested in the short term. However, the advantages of convertible bonds are different, starting from the fact that in the event of bankruptcy, this type of securities will have repayment priorities compared to the classic shares. Obviously then the convenience will be closely linked to the performance of the markets, given that in the event of an increase in the value of the shares we will have a profit, while in the event of a fall we will register a loss.

Subordinated payday loans

The last type of bonds that we present is that relating to subordinated bonds. Among the solutions we have seen, it is the most risky and consequently also the one that can lead to the greatest gains. The main risk concerns the duration of these bonds, which is very high and in many cases is not really defined. Often these securities are referred to as ” junior “, unlike the non-subordinated ones that are called ” senior “. In the event of bankruptcy, holders of junior securities will be reimbursed after senior creditors. We therefore consider it important to warn our readers by underlining the fact that with subordinated bonds there is a real risk of losing part or all of the capital invested in the event of insolvency on the part of the bank. So we advise you to consult a financial advisor or to study the past trend of financial markets very well before proceeding with the purchase of these securities, and to differentiate your investments so as not to expose yourself to too high risks.



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