A legal charge is a method by which a lender protects the money they have lent to an individual or company. It is a legal document signed by the borrower and which is registered against a property at the Land Registry so as to alert any potential buyer of the existence of the debt.
Whether a loan is a first, second or third charge describes the order in which the lenders can collect their money. The first charge lender will recoup their money, followed by the second charge lender, leaving the third charge lender last in line. This presents an element of risk for lenders who provide second and third charge loans. In the event that the property is repossessed and sold, they may end up losing out to the earlier lenders. Assets can only be secured for up to 100% of their sale value, which in theory means that every lender should make their money back.
However, if the property sells for less than its expected value this can easily lead to lenders further down the charge chain losing out.
The higher risk imposed means the interest offered to lenders will often be significantly higher.