Companies frequently borrow funds for investment, expansion, business development and operational requirements. In order for banks and financial institutions to grant funds to borrowers, there needs to be some form of assurance that the borrowed funds will be repaid to the lender. This assurance is obtained when borrowers offer an asset (as collateral) of equivalent or higher value to the lender. In the event that the borrower fails, the lender then has means to recover any losses. There are a number of security interests that are used by lenders which include mortgage, lien, pledge, and charge. The following article takes a closer look at two such security interests; lien and mortgage, and highlights their similarities and differences.
What is Lien?
A lien is a claim on an asset such as property or machinery that is used as collateral for funds borrowed or for the payment of obligations, or performance of services to another party. The lien will provide the lender the right to detain the borrower’s assets, property or goods to secure payment over obligations. The lender can only detain the property/assets/goods until payments are made, and do not have the right to sell any such assets unless explicitly stated in the lien contract. Nevertheless, the lender should be cautious when selling off assets to safeguard against any charges of liability. There are instances in which financial institutions, individuals, or entities that are owed money use legal avenues to impose a lien on the borrower’s assets; thereby securing against default. In such instances, the lender does not have any right to sell off the borrower’s assets.
There are different types of liens such as construction/mechanic’s liens that are placed on house owners who owe funds to construction and repair workers who provide services for property improvement. Other liens include agriculture liens, maritime liens, and tax liens. Liens are also imposed for receivable rent, unpaid premiums, or fees.
What is Mortgage?
A mortgage is a contract between the lender and the borrower that allows a borrower to borrow money from a lender for the purchase of housing/property. A mortgage is also an assurance to the lender which promises that the lender can recover the loan amount even if the borrower defaults. The home/property that is being purchased is pledged as security for the loan; which will, in the event of default, be seized and sold by the lender who will use sales proceeds to recover the loan amount. The possession of the property remains with the borrowers (as they will usually reside in their home). The mortgage will come to an end once in either two circumstances; if the loan obligations are met, or if the property is seized.
Mortgages have become the widely used method for purchasing real estate assets without having to pay the total amount at once.
What is the difference between Lien and Mortgage?
Liens are mortgages are quite similar in that they are both security interest options that are used for the same purpose; that is to ensure that loans are repaid and obligations are met. A mortgage is a type of lien, but a lien is not a mortgage. Mortgages are a type of lien as the mortgage document will provide the lender a claim over the borrower’s assets, which allows the lender to detain the property till payments are made. Liens, however, are not mortgages because it is a form of a security interest that can be claimed on different types of properties/assets, (including housing, automobiles, tools, etc.) and liens can also be placed over the payment of funds owed for a service provided.
Summary:
Lien vs Mortgage
• Liens are mortgages are quite similar in that they are both security interest options that are used for the same purpose; that is to ensure that loans are repaid and obligations are met.
• A lien is a claim on an asset such as property or machinery that is used as collateral for funds borrowed or for the payment of obligations, or performance of services to another party.
• A mortgage is a contract between the lender and the borrower that allows a borrower to borrow money from a lender for the purchase of housing.
• Mortgages are a type of lien as the mortgage document will provide the lender a claim over the borrower’s assets and allows the lender to detain the property till payments are made.
• Liens are not mortgages because it is a form of a security interest that can be claimed on different types of properties/assets and can also be placed over the payment of funds owed for a service provided.