When a consumer takes out a loan, the lender will often require some form of security to ensure repayment of the loan. Collateral is the term for the property the debtor offers as security. A lien is a legal claim placed on property that gives one party the right to take the property as payment for debt or services. There are many types of liens; those with specific lien questions should seek professional advice.
Many lenders demand security in case a borrower fails to repay a loan. Practically any item can be used as collateral, depending on the lender's requirements, but usually collateral refers to large-value items, such as real estate or vehicles. A loan given based on collateral is known as a secured loan, while non-collateral loans are unsecured. In the event that the borrower fails to repay the loan, the lender has the right to take the property and liquidate it in order to pay off the debt. Because the lender must typically accomplish the liquidation himself, the law values the collateral based not on its actual market value but rather on its liquidation value.
While liens and collateral often go together, they are not the same thing. A lien is a legal instrument that grants one party the right to property until that party is paid or otherwise reimbursed for something owed. A lien is a security interest, but unlike collateral, a lien may be imposed by law after the loan or other transaction is made. A lien doesn't grant actual ownership of the liened property, but it does give the lien holder the right to seize the property if the owner doesn't meet his obligations.
Common Lien Types
The law recognizes more than 30 types of liens. Some of the more common include judgment liens, in which a plaintiff who wins a court judgment may place a lien on the defendant's property in order to receive payment; mechanic's and accountant's liens, in which parties who render services to others can place liens on the serviced party's property until they receive payment; and landlord's liens, in which a landlord who has the right to back-owed rent can seize the renter's property until he receives payment.
Mortgages as Liens
In a mortgage, a party buying property borrows money and gives the lender a security interest in the property in the event that he fails to make payments on the loan. U.S. jurisdictions are split on whether a mortgage acts as a lien. Most jurisdictions consider a mortgage to act as a lien, a simple security interest in the event of non-repayment. However, a few jurisdictions do find that a mortgage actually gives the lender ownership of the property until repayment.