What Is a Primary Loan?

You can secure several loans with the same collateral as long as it has sufficient value to cover the balance of each loan. Real estate professionals and lenders refer to the first loan that you record on a particular piece of collateral as the primary loan. Primary loans are typically cheaper to obtain than other types of loans because primary loans expose lenders to less risk.


Lien Recording

When you take out a mortgage or another type of loan secured by residential or commercial property, your lender has to record a lien against your home in order to attach the debt to the property. Lenders file liens at the local county courthouse and the lien remains in effect until you pay the loan off, at which time the lender must file a satisfaction of lien to release its claim on your property. If you default on a secured loan, a lender with a recorded lien can foreclose on the property and sell it to recoup the debt.


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Multiple Liens

If you have several liens on the same property, the lender that wrote the first loan, or primary loan, occupies the first lien position. If you default on any of the loans secured by the property and fall into foreclosure, the first lien holder has the first claim on the sale proceeds of your home. This means that if you fail to pay a second lien equity line of credit, the equity line of credit lender can foreclose but sale proceeds are first used to pay off the primary loan. If any funds remain after paying off the primary loan, then the secondary lien holder can claim those funds.



A primary lien holder faces less risk than a secondary lien holder because if you default on your debts the primary lien holder has a much better chance of recouping its losses than the other lien holders. Therefore, you pay a lower interest rate on a primary loan than on a secondary loan because interest rates are driven by risk. Most primary lien holders only allow you to finance up to 80 percent of your property value and this protects the lender against the risk that your property could lose value over time.


Other Considerations

Primary and secondary loans are normally associated with real estate lending rather than vehicles or other types of collateral. In theory you could have a primary loan and multiple other loans that are secured by any kind of property but most lenders are reluctant to write multiple loans against depreciating collateral. Even though homes can lose value, land has steadily risen in value over time so homes are not viewed as depreciating collateral. Cars and other vehicles eventually become obsolete, which means lenders are exposed to a greater level of risk when securing liens to vehicles, and few lenders write secondary loans on types of collateral that will ultimately become worthless.


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