Financial Dictionary -> Debt -> Lien

Lien is a legal term that grants a certain right to somebody over somebody else and usually refers to a form of security interest granted over an asset to secure repayment of a debt or loan. The asset that is used in lien is known as the collateral. When a loan is fully paid back or the contract is completed the lien is removed and the lender no longer has any right of the property. This is used primarily to make sure a borrower pays back their debt and secure the lender if that does not occur.

In real estate a common form of lien is when the lender of a "first mortgage" is granted "primary lien" over the collateral of a home if the borrower fails to make payments and defaults. In other words when the house is sold, the lender of the first mortgage gets their repayment via collateral before any "second mortgages" or loans, because they are granted lien or the right to secure their repayment first.

In the United States Liens can be classified as voluntary or involuntary. Voluntary liens occur when a lender and borrower go in to contract together. Examples of these include conventional loans, mortgages and virtually any other credit or loan agreement. Involuntary liens include things like lien for unpaid taxes and judgment liens.

A lien can also be classified as perfect of imperfect. In the example explained above the first mortgage lender who is granted primary lien is known as having the perfect lien, meaning they have the right before any other third party lenders to collateral repayment. Any third party lenders will be informed of the lien when appropriate.

One form of lien known as equitable lien works with the value of equity in a property, which is not actually physical money until the house is sold. People may be granted equitable lien in various circumstances, such as an occupant of a property spending money on improvements believing they are the owner of the property. They then become the owner of the equity created from the improvements. For example building an extension would put the value of the property up. That extra value is granted in lien to the occupant in the above example.