A structured loan product is a specially designed loan that goes beyond standard borrowing agreements. It merges a conventional loan with one or more derivatives—financial contracts whose value depends on underlying assets like interest rates, currencies, or commodities—to create a tailored financing tool.
Unlike typical loans such as a fixed-rate mortgage or a car loan, structured loans customize payment schedules, interest rate behaviors, or currency exposure to match the borrower’s unique financial situation. For example:
- Interest rate caps or collars can limit how high or low an adjustable rate can move.
- Payment amounts may vary according to project milestones or cash flow changes.
- Loans can be linked to currency exchange rates or commodity prices to hedge risks.
These modifications allow lenders and borrowers to manage financial risks and adapt to variable income streams, especially in corporate finance or large-scale investments.
Common examples include commercial real estate loans with interest-only periods during construction, leveraged buyout loans with repayments tied to acquired company earnings, and balloon mortgages requiring a large lump sum payment after initial smaller payments.
Structured loans offer significant customization and flexibility but come with increased complexity and risks. The embedded derivatives and complex terms require thorough understanding and expertise, as they can lead to unexpected financial consequences.
The 2008 financial crisis underscored the dangers of structured products when poorly understood mortgage-backed securities contributed heavily to the market collapse.
Borrowers considering structured loans should consult financial professionals and carefully review all terms. These products are primarily available through investment banks and specialized commercial lenders rather than standard consumer lending institutions.
For further reading on related loan types, see our articles on Mortgage Loan and Business Term Loan. To understand the derivative components better, visit our Credit Event glossary.
Sources:
- U.S. Securities and Exchange Commission, Structured Products Overview: https://www.sec.gov/structuredproducts
- Investopedia, Structured Notes: https://www.investopedia.com/terms/s/structurednote.asp
- IRS Publication 535, Business Expenses, for understanding related tax implications
(Information verified as of 2025)