Legal Definitions - loan participation

Definition: Loan participation is when multiple lenders collaborate to provide a large loan, known as a participation loan, to a single borrower. This helps to reduce the risk for each lender.

Example: Let's say a borrower needs a loan of $1 million. Instead of one lender providing the entire amount, five lenders each contribute $200,000 to create a participation loan. This way, if the borrower defaults on the loan, each lender only loses $200,000 instead of the full $1 million.

Explanation: Loan participation is a way for lenders to spread out the risk of lending money to a borrower. By collaborating and pooling their resources, lenders can provide larger loans to borrowers who may not be able to secure the full amount from a single lender. This also benefits the borrower, as they have access to more funds and potentially better loan terms.