What is a Lien?

By Melissa Cook Reviewed by Minh Tong Updated Dec 12, 2022
What is a Lien?

A lien is a legal claim that gives a lender or creditor the right to take and sell your property. For example, if you have an auto loan, then the bank or financial institution that issued your loan has a lien on your car – meaning they can legally force the sale of your vehicle in order to collect money owed by you. If you pay off all loans associated with that vehicle, then the bank will release its lien on it. A lien comes into effect as soon as someone lends money to another individual or entity – whether it’s for a business loan, medical debt, tax bill, student loan etc. When this happens, the borrower (or debtor) is generally required to sign over some sort of collateral (i.e. jewelry, vehicle or real estate) to guarantee the debt will be paid back in full. However, sometimes creditors will demand more collateral than what was initially loaned – this is known as over-secured collateral and there are many legal protections for borrowers when it comes to this situation. For example, if a borrower decides not to pay back the loan, then the bank should have access to enough financial resources from the sale of their new property (or other assets), such that they won’t incur any losses by selling off the collateralized assets. The difference between a lien and a mortgage is that a mortgage secures your property against an actual asset; whereas with a lien you are simply guaranteeing that you’ll repay someone else’s debt. Therefore, a lien can be placed on all types of property – including cars, houses, jewelry and businesses. If you’ve ever taken out a loan in order to finance any of these purchases, then chances are that the creditor has recorded a lien against your item until it’s been paid back in full.

A lien is essentially an agreement between two parties where one owes money to another person or institution. In most cases the person or organization who lends money (the lender) will retain their rights to that money by placing a legal claim on an asset owned by the borrower. This gives them priority over other creditors if/when the borrower defaults on payment for whatever reason; and it also makes them eligible for repossession of the asset if it isn’t paid back in full. In some cases, lenders will demand a lien on additional collateral beyond what was initially given to them as loan security. This is known as over-secured collateral and is meant to ensure that they’ll still receive compensation from the sale of assets, even if the borrower defaults on their debt payments or is unable to afford repayment for any reason.

There are many different types of liens that can be placed against an individual’s property; however, most commonly this will involve real estate (i.e. houses), vehicles, jewelry and businesses. If you have ever taken out a loan in order to finance any of these purchases then chances are that whomever you borrowed money from has filed a lien against it until that debt is fully paid off. In contrast to this, a mortgage on property secures your home or land against a real asset; whereas with a lien you are guaranteeing that you’ll repay someone else’s debt and therefore not actually putting up any of your own assets for collateral. Therefore, creditors often place liens on people’s items as soon their loan application has been approved – even if the borrower hasn’t yet received the money they’ve requested. This is done in order to protect them from risk in case they end up defaulting on their payment plan, go into bankruptcy etc.

So essentially, a lien is an agreement between two parties where one owes money to another person or institution. They can be either voluntary or involuntary, with the first being completely up to the borrower’s discretion. However, if you end up defaulting on payment then your creditors can sue you and place a lien against any of your assets as means of compensation. This is different from a mortgage in that there isn’t an actual asset attached – i.e. property you are putting up as collateral to guarantee payment – and therefore it doesn’t come with all of the protections that mortgages do (i.e. foreclosure). In order to avoid this risk, most banks will ask for some sort of additional collateral in addition to the principal amount that was loaned; which will result in over-secured collateral and ensure that they’ll receive fair compensation for their financial losses, regardless of whether or not the borrower pays back the loan. Therefore, it’s always important to consider what assets you own before taking out a loan for any major purchases; since there is always a chance that your creditor could end up placing a lien against them as means of repayment if you default on payment.

A lien also differs from other types of debt financing in that it has priority over other creditors – meaning that all other lenders must first reimburse whoever placed the lien against their property, before they get anything (or anything at all). For example, if you borrow money from one bank and then default on payment and continue borrowing money from another bank until you can no longer afford to make payments, the second lender will have to wait until the first bank has been reimbursed in order to receive their compensation. The same would be true if a mortgage lien was placed against your house and you then took out another loan to finance car purchase, etc.; all other creditors must reimburse your lender before they can collect anything from you. This is why it’s extremely important to ensure that whoever you are borrowing money from not only has good credit but also offers competitive interest rates on loans, since this gives them more incentive to offer lower processing fees and better payment plans for debtors. In addition to this, it’s often recommended that borrowers look into different types of financing options, such as extending their repayment terms beyond what the original payment plan stipulated, in order to reduce the amount that must be repaid each month. This allows them to maintain a budget that is easy to stick with and ensures they don’t end up defaulting on their loans and putting liens against their assets.
So although it’s not legally required to disclose whether or not your creditor has placed a lien against any of your property, it’s always in the borrower’s best interest to ensure that they understand exactly how much money they’re borrowing; what terms are being offered and importantly, who will receive payment should you default on your payments. It may seem like an unnecessary step at first but when you consider the fact that this can create serious problems for anyone whose assets have been put up as collateral for their loan, it becomes clear that a little due diligence goes a long way in ensuring that your financial life isn’t ruined by an unexpected lien.
For more information on liens and for financial guidance, talk to an Americor professional today.


Melissa Cook

Melissa has a degree in English and marketing from University of California Irvine. She is a creative and accomplished content writer and editor with comprehensive experience developing rich, compelling content for a variety of websites. With her expertise in writing a broad range of content, combined with outstanding interpersonal skills and commitment to exploring innovative ideas, Melissa has done an excellent job developing content for blogs, articles, social media, and the company website. When she is not writing, Melissa spends most of her time cooking, traveling the world, and catching her favorite Broadway shows.