A lien is a legal agreement that gives a creditor the right to your property if you do not fulfill your responsibilities in the agreement.
There are multiple kinds of liens as well, like property liens, tax liens, and legal judgment liens. By using a lien, a lender can get the assurances they need to secure a loan and the borrower can secure the loan amount they need. If you’re using an asset or property as collateral in a loan, then you’ll probably have to deal with liens.
A lien is like temporary shared ownership of a property. It is a legal document that allows someone else, like a lender, to also be named among the owners of a property. For example, if you take out a title loan, the lender will put a lien on the title of your car. This means the lender will be one of the owners listed on the car’s title until the title loan is repaid.
This type of shared ownership is usually temporary and only during the duration of a loan. Using a lien is what helps guarantee someone’s obligation. It helps ensure that a loan will eventually be repaid.
A lien holder can be many people. Usually, it’s going to be someone that would somehow have a right to ownership of an asset if something isn’t repaid. For example, if you take out a title loan the lender will become a lien holder on the title of your vehicle. Someone who holds a lien could be a creditor, a lender, someone involved in a legal judgment, or a government entity.
A creditor can become a lien holder when they acquire unpaid debts and seek the repayment of those unpaid debts.
The government can become lien holders during court cases. For example, if someone’s unpaid debt goes to court, the law could become the lien holder in order to see that the assets are paid off or sold to repay the unpaid debts. A legal judgment can also give the lien ownership over to someone, like a creditor.
Liens work by allowing lenders to have ownership over an asset should the loan not be repaid. It also allows borrowers to use assets as loan collateral.
Let’s take you through a common lien example. You go to buy a car from the dealership. You can’t afford the $20,000 it would take to buy the car that day, so you work with the dealership to take out a car loan with a lender.
This lender pays the dealership in your stead and now you will make regular monthly car payments to the lender until the car is paid off. Until that happens, that lender will have a lien on your car’s title. Once the loan is repaid in full, the title will return to you with no more liens. This can be referred to as a clean car title.
In the case that the loan on the property is not repaid, the lien holder might have to seize the property for themselves in order to sell it and repay the loan money owed.
Liens aren’t just placed on car ownership though, they can also be on other types of property like taxes or houses. There are 2 reasons you might have a lien on property:
In both cases, the lender will retain partial ownership of the property until the loan is repaid in full.
A lien on a car could be placed on a vehicle that has just been bought using an auto loan, or by a lender who just gave a borrower a title loan. Either way, they function very similarly.
When you buy a car using a loan, the lender of that loan keeps a lien on that vehicle until you no longer owe them money. If you use the title of your car to take out a title loan, then the title loan lender will take out a lien on the title of your car until the title loan is repaid.
A judgment lien can be placed on any kind of property or asset. The difference with a judgment lien is the person enacting the right to the property. Judgment liens are used by the court system when a lawsuit requires the transfer or selling of property or assets. This allows the court to have legal ownership to transfer or sell those assets according to the specific court circumstances.
Some liens are created by laws rather than loan agreements. One example of a government lien is a tax lien. This is when the IRS places a legal claim on the property of someone who owes taxes. If someone owes taxes that they haven’t paid for a long enough period of time, the IRS may use this tax lien to seize their property to help pay for the taxes owed.
A lien on a house can sometimes be called a real estate lien. Usually, it’s connected to someone’s mortgage. If someone becomes delinquent on their mortgage payments, meaning they haven’t kept up with their mortgage payments for a long enough period of time, then the mortgage lender may use their real estate lien to seize the house and sell it to repay the loan.
Liens certainly have their uses. They can help everyday people get the things they need like a car to drive or a home to live in. They can also help people get the loan funding they need using collateral loans.
