What is a Non-Possessory Lien?

Liens can be of two types: possessory and non-possessory. In non-possessory lien, the collateral is not physically possessed by the lending institution but its right on the collateral is recognized and protected by the law. The lender is allowed to repossess the asset upon payment default.

For example, when banks or other financial institutions issue a loan that is secured by the real estate, the issuer does not physically possess the asset but its claim on the asset is established. The home is not in possession of the lending institution, but the institution has a lien on it. It is a legal right of ownership contingent to the fact that the debtor fails to repay his or her debt. If the debtor fails to repay the amount according to the stipulation, the lending institution can recover the debt amount by selling the property used as collateral.

How Do Possessory and Non-Possessory Liens Work?

In a possessory lien, the creditor physically holds the possession of the collateral. Pawn shops keep the collateral in their possession to give out loans to their customers. They physically hold the asset with themselves and if the customer fails to repay the loan, the pawn shop owner is allowed to sell the collateral to recover the amount. Non-possessory liens can be taken when a third-party has no other legal means of securing payment of a debt. For example, housing association may want to obtain a non-possessory lien against a home-owner to enforce payment of the assessment or other costs that the unit owner may be obligated to pay.