When evaluating financing options, one of the most important distinctions to understand is first lien loan vs second lien loan.
Both play a key role in lending, especially in real estate and business financing. The difference comes down to repayment priority, interest rates, risks, and how each type of loan is used.
Let’s break down first lien loans vs second lien loans, how they work, and what borrowers need to know.
What is a First Lien Loan?
A first lien loan is the primary loan secured by a borrower’s collateral, most commonly real estate. The term “first lien” refers to the lender’s legal right to be repaid first if the borrower defaults and the property is sold or foreclosed.
Since the lender holding the first lien has the highest repayment priority, this loan carries less risk compared to other types of financing.
One of the key features of a first lien loan is its repayment priority. In the event of default, the first lien lender gets paid before any other creditors or lien holders. This added security allows lenders to offer lower interest rates, making first lien loans generally more affordable for borrowers.
For borrowers, a first lien loan is often the foundation of their financing strategy, providing access to larger loan amounts at more favorable terms.
Ultimately, a first lien loan provides the lender with the highest level of protection while giving the borrower a cost-effective way to finance major purchases or investments.
What is a Second Lien Loan?
On the other hand, a second lien loan is a type of financing that is subordinate to a first lien loan. This means that if the borrower defaults and the property used as collateral is sold, the first lien lender gets paid first, and the second lien lender is repaid only after the first loan is fully satisfied.
Because of this repayment order, second lien loans carry higher risk for lenders and usually come with higher interest rates.
Unlike first lien loans, which are often the primary source of financing, second lien loans are typically used as supplemental funding. Borrowers may take out a second lien loan when they already have a first mortgage or primary loan in place but need additional capital.
From a borrower’s perspective, second lien loans can provide flexibility and access to extra funds that may not be available through a first lien loan alone.
First Lien Loan vs. Second Lien Loan: Comparing Interest Rates
One of the biggest differences between the two loans lies in their cost.
First lien loans typically offer lower interest rates because lenders have first priority on repayment.
Second lien loans usually come with higher interest rates to compensate lenders for taking on greater risk.
For borrowers, this means a first lien loan is generally more affordable, while a second lien loan can be a costlier option. However, the latter provides access to additional funding.
First Lien Loan vs. Second Lien Loan: Comparing Risks and Collateral
Now, let’s compare the risks and required collateral of first lien loan vs. second lien loans:
First lien loans carry less risk for lenders and are secured by collateral with top priority. Borrowers benefit from lower costs but may face stricter qualification requirements.
On the other hand, second lien loans are riskier for lenders since repayment is not guaranteed if collateral value doesn’t fully cover all debts. Borrowers can access these loans more flexibly, but they come with higher rates and potential repayment challenges.
From a borrower’s perspective, the main risk of a second lien loan is that it increases total debt obligations, which could strain cash flow if repayment becomes difficult.
First Lien Loan vs. Second Lien Loan: Comparing Use Cases
Both loan types serve different purposes in financing:
First lien loan use cases:
Purchasing property (residential or commercial)
Residential and commercial mortgages
Real estate investment financing
Senior secured business loans
Refinancing primary debt.
Large-scale business or real estate projects
Second lien loan use cases:
Homeowners leveraging equity with a home equity loan
Businesses raising additional capital through mezzanine financing
Investors bridging financing gaps when a first lien loan isn’t sufficient
Borrowers often use second lien loans alongside first lien loans to maximize financing opportunities.
Which Loan is Right for You?
Choosing between a first lien loan vs second lien loan depends on your financial situation and goals. Here’s a quick tip:
If you want the lowest interest rate and maximum security, a first lien loan is best.
If you already have a first lien loan but need additional financing, a second lien loan may provide the flexibility to access more capital.
Before deciding, evaluate your repayment ability, risk tolerance, and long-term financial strategy. Speaking with an experienced lender like SDC Capital can help you determine which option fits your needs.
Need help? Call us at 424 304 1072 or email info@sdccap.com to get started.