Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Property Lien

What it is:

A property lien is a lender's claim against a piece of real estate that may be legally sold should the borrower fail to repay a loan.

How it works (Example):

When someone takes out a sizeable loan, such as a home mortgage, the lender often requires an asset that can be held as collateral against the loan. Thus, the collateral has a property lien placed upon it. In the event of non-payment on the part of the borrower, the lending institution can exercise the property lien and sell the collateral asset to offset the unpaid loan. Once the loan is repaid in full, the collateral asset is returned to the borrower and the property lien dissolved.

To illustrate, suppose someone takes out a $500,000 loan for a new house. As part of the loan's terms, the bank gets to hold the title to the house as a property lien against the house until the loan is fully repaid. Should the borrower default, the bank can use the title to the house to sell it in order to recover the money that was lent.

Why it Matters:

A property lien protects lenders in the event of non-payment. Since loans with collateral are less risky for the lender, they can lead to lower interest rates for the borrower.

When purchasing a used car, for example, it's important to check for liens against the vehicle. If there is an outstanding debt on the car, the buyer runs the risk of having it repossessed by the lender.