Possessory Lien
A possessory lien takes place when any lender decides to retain physical possession of the underlying collaterals that occur during the term of a loan agreement. Under this mechanism, the lender has a legal right to retain possession of the collateral until the obligation gets retired or till the other conditions are also satisfied. After the terms of the final agreement are fulfilled, the debtor can then take the possession of the underlying asset. While a possessory lien can be used eventually to claim legal ownership of the collateral, a lien on any asset or a piece of property is not a grant of ownership despite the lender retaining the possession of the collateral. It is still a contingent claim on the ownership that helps to encumber the asset. The borrower can legally own the collateral until and unless there is a legal reason for a lender to make a claim to the ownership under the lien.
Any possessory liens can also be held by an entity other than the traditional lenders like the government for the purpose of tax payments. A pawnbroker is one of the most common examples of an instance where a possessory lien is also a part of the entire transaction. Any individual may give their personal jewellery to a pawnbroker in exchange for any loans. Although it is owned by a borrower, the jewellery also acts as a collateral and then remains in possession of a pawnbroker till the loan gets successfully repaid by the borrower.
Non-Possessory Lien
A non-possessory lien is a mechanism that allows a borrower the right to retain the possession of collaterals that are securing any loans or obligations. While any debtor has physical possession of the asset, the name of the lender appears on the title for any collateral. If a borrower does not fulfil their financial obligations and defaults on a non-possessory lien, then the lender can also take the possession of the underlying security.
Mortgages are among the most common types of loans that use non-possessory liens. When any lender approves the mortgage, then the borrower can also take possession of the property or home after the closure of the real estate deal. Any automobile loans also have non-possessory liens. Just like any mortgage, the owner also holds possession of their vehicles, while a financial institution that issues the loan also retains the title. This then allows a lender the ability to also take the possession of a vehicle in the case of a default. In case the loan is cleared without any hitch, then the name of the bank is also removed from the title as it gives the owner a full claim against an asset.
Difference between Possessory and Non-Possessory Lien
Both possessory and non-possessory lien play an important role in the mortgages sector. However, it must be noted that there are major areas of difference between possessory and non-possessory lien, and it is important for us to focus on the main points to get a wider perspective of these two instruments:
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A possessory lien takes place when any lender retains physical possession of the underlying collateral during the term of the loan or agreement. |
A non-possessory lien allows the borrower the right to retain possession of the collateral, securing a loan or obligation. |
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Possessory liens are commonly held by pawnbrokers. |
Non-possessory liens are commonly held by holders of mortgages and car loans. |
Conclusion
There are a number of points of difference between possessory and non-possessory lien. But both of them perform a very crucial role in the industry. They also have a part to play in the overall growth of businesses, both in the short as well as the long run.
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