Updated on October 4, 2023
When you take out a loan, it’s essential to be familiar with various terms and concepts that can affect your financial transactions. One such term is ‘Lien.’ given here is a detailed explanation of the same.
Meaning of Lien in Loans
A lien is a legal right granted to a lender or financial institution that allows them to retain possession of certain assets belonging to the borrower until a specific condition is met. In the context of loans, a lien serves as a form of security or collateral for the lender, ensuring that they have a claim on the borrower’s assets if the borrower fails to meet their loan obligations.
Types of Lien in India
Equitable Lien – It arises from a borrower-lender agreement and involves no physical asset possession rather a establishes a legal claim on specific assets in case of default (e.g., car loan).
Legal Lien – This involves the lender’s physical possession of the borrower’s assets as collateral until full loan repayment (e.g., gold jewellery pledged for a gold loan).
What is the purpose of Lien in Loans?
Lenders use lien as a risk mitigation strategy. By having a claim on specific assets, they can recover their outstanding dues if the borrower defaults on the loan. Lien provides a level of assurance to lenders, which often allows them to offer loans at more favourable terms and interest rates, as the presence of collateral reduces their risk.
What are the implications of Lien for a borrower?
Asset Control – The lender gains control or ownership over collateralized assets which limits selling or transferring rights without lender consent until the loan is repaid.
Risk of Asset Loss – Defaulting on the loan allows the lender to legally seize specified assets, potentially resulting in asset loss if repayment is not possible.
Loan Approval – Collateralized loans, with assets pledged as security, can lead to easier approval, lower interest rates, and better terms, especially for larger loans.