Whenever you borrow a loan for buying an asset such as a car or a house, the institution from which the loan has been borrowed will place a lien on the asset. In simple terms you can say that if you buy a car on loan, the bank that you borrowed the loan from will grant a lien on that car. But what does this lien mean? Well to make it simple for you to understand you can say that it gives your lender the legal right to take away the asset for which you have borrowed the loan in case you fail to repay the loan amount in the given time period. The term lien plays an important role in the financial world and hence it is important to understand. To understand this term and its importance in detail, we will go through the basics of this term and see how it works and what different types of liens are there.
What is a Lien?
The term lien refers to a legal claim or legal right which is made against the assets that are held as collaterals for satisfying a debt. A lien can be established by a creditor or a legal judgement. The purpose of the lien is to guarantee an underlying obligation such as the repayment of the loan. In case the borrower fails to satisfy this underlying obligation, the lender or the creditor has the legal right to seize the asset that is subject of the lien. Many types of liens are used to secure assets.
The three main types of lien are bank, real estate and tax. When it comes to property, the contract on the property needs to be paid. In case the contract is not paid, the lender has the legal right to seize the property as well as to sell the property. Liens can be of various types depending on who they are generated by. A creditor, legal judgement or tax authority can generate a lien.
How does a Lien work?
When giving out a loan to a borrower, the creditor is always faced with a risk that the borrower may fail to repay the given amount on time or just won’t repay it at all. To avoid this, the concept of a lien is considered to be highly useful. A lien provides the creditor with the legal rights to seize and sell the collateral assets or property which is the subject of the lien without the consent of the lien holder or the borrower. When the lien is granted on an inventory or any other unfixed property, it is known as a floating lien.
Although, liens are often voluntary and consensual like the lien on the property for a loan, there also exist involuntary or statutory liens. Involuntary liens are where the creditor or the lender seeks a legal action against the borrower for nonpayment of the loan. After such legal action is taken, a lien can be placed on assets including property as well as bank accounts.
Some liens are also filed with the government in an effort to let the public know that the lienholder has an interest on the property or on the asset. Having a public record of a lien helps the people to know that a particular asset or property is subject to a lien and if they are interested to buy that particular asset or property, the lien first needs to be released as the asset or property cannot be sold with the lien. This is something that will help all the interested buyers to know about the financial record of the asset or the property before making a decision of buying it.
What are the different types of Liens?
Now that we know what the term lien stands for and we have seen how it works and why it is important in the financial world, it is time to learn about the different types of liens that are out there. As discussed above, there are many types of liens and lien holders. A lien can be placed by governments, financial institutions, as well as by small businesses. We are going to see five of the most common types of liens, which are bank lien, judgement lien, mechanic’s lien, real estate lien, and tax lien. To understand each of these types better let us go through each one of them individually.
Bank Lien Bank lien is the lien which is often granted when the individual takes a loan from a bank to purchase an asset. For instance, you borrow a loan from a bank to buy yourself a car. The price of the car will be paid by the loan amount. This gives the bank the legal right to grant lien on the car. Now, in case you fail to repay the loan and interest that was promised at the time of borrowing the loan, the bank has the right to take the asset that is the car, into their possession. However, if you successfully pay off the loan on time, the bank will release the lien and you will become the rightful owner of the car.
Judgement lien When a lien is placed on the asset by the court, usually as a result of a lawsuit, it is referred to as a judgement lien. This judgement lien can be helpful to the defendant in getting paid back in a nonpayment case by liquidating the assets of the accused.
Mechanic’s lien The lien attached to real property in case the owner fails to pay a contractor for the services he has rendered is referred to as a mechanic’s lien. In case the owner never goes through with the payment, the contractor has every right to take the debtor to the court and get a judgement in which usually the property or assets are auctioned off to pay the lien holder.
Real estate lien The legal right to seize or sell a real estate property on nonfulfillment of a contract is referred to as a real estate lien. In case you borrow a loan from a bank in order to buy a house, a lien is placed on the house by the bank until you pay off the mortgage. If you fail to repay the mortgage the bank has the legal rights to seal your property.
Tax liens Tax liens are the liens created by law. The law often allows tax authorities to put liens on properties of taxpayers who do not pay the taxes on time.
