A lien is a legal right to claim a security interest in a property provided by the owner of the property to the creditor. It is generally used as a guarantee for some sort of legal obligation such as loan repayment.
In other words, a lien ensures that a creditor obtains the right to the property if a borrower fails to meet his legal and/or financial obligations. The grantor (the owner of the property) is called the lienee while the party that receives the lien is referred to as the lienor or lien holder.
Types of Liens
Consensual liens are created by contractual obligations between the concerned parties. The most common examples are loans obtained to purchase real estate or personal property (chattel). They can be mortgages or auto loans.
Non-consensual liens arise from statutory or common law. The most notable example is a tax lien, which is imposed by law against the property of a taxpayer. If a taxpayer fails to pay the taxes owed to the government, the tax agency can seize his or her real or personal property for the amount of the lien.
Example of Lien
John wants to purchase a new house. In order to afford the purchase, he borrows $300,000 from ABC Bank. The bank wants to guarantee the repayment of the loan, and it requires John to provide the house as the collateral for the loan.
The bank files the documents with the government agency required to register the lien. Upon the completion of the process, the bank becomes the holder of the collateral provided by John (in this case, John’s house).
If John is unable to meet his financial obligations according to the mortgage agreement with ABC Bank, the bank will take possession of the property and will be able to sell it to satisfy the loan obligation.