Second Lien Debt

DEFINITION of 'Second Lien Debt'

Debts that are subordinate to the rights of other, more senior debts issued against the same collateral, or a portion of the same collateral. If a borrower defaults, second lien debts stand behind higher lien debts in terms of rights to collect proceeds from the debt's underlying collateral.

BREAKING DOWN 'Second Lien Debt'

When lenders issue loans to borrowers, they commonly require that collateral be made against the principal of the loan to ensure that the principal can be repaid in the future.

In the case of a real estate mortgage, the lender effectively places a lien on the asset so that if it is sold, the lender will be first in line to receive funds. If a second mortgage is taken out on the same property, the second loan will be considered second lien debt to the first mortgage, and will be subordinate to the first in terms of return of principal. For this reason, second lien debt is usually considered riskier than higher lien debt and often comes with a higher interest rate as a result.

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