Second Lien Debt

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Inchoate

    A state of activity or entitlement that is characterized by partial ...
  3. Non-Possessory Lien

    The legal claim against an asset in order to secure payment of ...
  4. Absolute Priority

    A rule that stipulates the order of payment - creditors before ...
  5. Collateral

    Property or other assets that a borrower offers a lender to secure ...
  6. Creditor

    An entity (person or institution) that extends credit by giving ...
RELATED FAQS
  1. How can I create a yield curve in Excel?

    You can create a yield curve in Microsoft Excel if you are given the time to maturities of bonds and their respective yields ... Read Full Answer >>
  2. What are the different formations of yield curves?

    There are three main different formations of yield curves: normal, inverted and flat yield curves. The yield curve describes ... Read Full Answer >>
  3. Can small investors buy collateralized mortgage obligations (CMOs)?

    Collateralized mortgage obligations (CMOs), which are pools of mortgage-backed securities (MBS), are available to smaller ... Read Full Answer >>
  4. What is the difference between an option-adjusted spread and a Z-spread in reference ...

    Unlike the Z-spread calculation, the option-adjusted spread takes into account how the embedded option in a bond can change ... Read Full Answer >>
  5. What are some historical examples of debt securitization?

    The first debt securities were probably sovereign debt assets that were transferred from the British government to mercantilist ... Read Full Answer >>
  6. What is the difference between the rule of 70 and the rule of 72?

    The rule of 70 and the rule of 72 give rough estimates of the number of years it would take for a certain variable to double. ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Profit From Mortgage Debt With MBS

    Mortgage-backed securities can offer monthly income, a fixed interest rate and even government backing.
  2. Bonds & Fixed Income

    An Overview Of Corporate Bankruptcy

    If a company files for bankruptcy, stockholders have the most to lose. Find out why.
  3. Options & Futures

    Top 7 Most Common Financial Mistakes

    Choose fortune over disaster by avoiding these money traps.
  4. Professionals

    Why You Should Avoid Fixating on Bond Duration

    Financial advisors and their clients should then focus on a bond fund’s portfolio rather than relying on any single metric like duration.
  5. Investing

    The Case For Stocks Today

    Last week, U.S. equities advanced with the S&P 500 Index notching new records. Investors are now getting nervous with rate and currency volatility spiking.
  6. Mutual Funds & ETFs

    Why You May Want To Be (And Stay) In Bonds

    Bonds are complicated, and it’s easy to feel intimidated or confused. Fortunately, you don’t need to be a numbers geek to be an informed investor.
  7. Home & Auto

    What Are The Tax Advantages Of Buying A Home?

    Don't forget these deductions and credits that homeowners can use to reduce their tax bill.
  8. Investing

    Why Some Investors Are Tilting Toward TIPS

    Last month’s five-year TIPS auction drew nearly $48 billion in interest, a sign of recent renewed demand for this inflation indexed asset among investors.
  9. Mutual Funds & ETFs

    The EMAG Emerging Mkts Bond ETF: Worth the Risk?

    The Market Vectors Emerging Markets Aggregate Bond ETF (EMAG) might offer long-term rewards, but is now the best time to jump in?
  10. Mutual Funds & ETFs

    5 Dividend ETFs with Growth Potential

    A quick look at a few ETFs with substantial growth potential.

You May Also Like

Hot Definitions
  1. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  2. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  5. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  6. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
Trading Center