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What in the World is a Lien?

So, you’ve decided to dip your toes in the financial world, see a term you don’t know, and decide to give it a search. 

“Hey Google, what’s a lien?”

And this pops up: “A claim or legal right against assets that are typically used as collateral to satisfy a debt.”

Okay, that didn’t help.

Let’s be honest. A lot of financial terms look like gibberish. Unfortunately, due to this competitive economy, you have to know them. In fact, if you’re looking to own a vehicle or a car, a lien is an essential process. 

So before you dive headfirst into loans, let’s wrap our heads around just what a lien is.

Liens: A Different Kind of Animal

When you hear the word ‘lien,’ what do you picture? If you’re imagining a gold, majestic animal, scale it back. What we’re talking about is a bit more technical.

Owing money comes with a variety of risks. You know the basics: loans, investments, mortgages. Though more nuanced, liens are an integral part of that process.

When you owe a financial institution money, a lien is a personal property they use as a fallback in case you can’t pay them back. In even simpler terms, it’s a financial threat or a handshake. When taking out a loan, your lender is saying: “If you don’t pay us back, we’re going to take this,” usually in reference to your home or vehicle, though it can apply to many things. Even mechanic work. (We’ll get into that.)

Still doesn’t make sense? With a few examples below, it’ll snap into focus.

What is a lien on a house?

So, you’ve bought your first house and made a monthly plan to pay it off. The catch is - if you can’t pay back your home, the lender can sell it to make their money back. In this case, the house is collateral.

So, the lien is on your home and keeps you focused and committed to paying it back. If you don’t… You lose it.


What is a lien on a car?

Picture this. You decide to buy a BMW X1, with a price of $30,000. (Optimistic, we know). 

All you have at the time of purchase is $10,000, so you take out a car loan. The lien is placed on your car until you pay it back. While financing your vehicle, you’re voluntarily putting it at risk. 

So, if in a year, you aren’t able to pay off your loan, the car company can repossess the vehicle. It’s simple, really. 

What is a Mechanic’s Lien? 

If a mechanic finishes work on your house and doesn’t timely receive payment, they can file a mechanic’s lien. In this case, because the mechanic worked on the property, they can also file a lien on it. 

Voluntary versus involuntary liens

The instances listed above are examples of voluntary liens. In those cases, you made a deal with the company knowing that you were putting your real estate on the line. On the other hand, involuntary liens are assets marked as collateral due to failure to pay unrelated debts.

Keep reading, it’ll make sense. 

A Tax Lien

If you fail to pay your taxes, more than just your credit score is at risk. In this case, the insurance company can put a lien on your home, meaning if you can’t pay it off, they’ll take it.

This is a clear example of an involuntary lien because it indirectly results from a separate debt. All to say, it is crucial to pay off all your debts and loans. Otherwise, it will come back to bite you.

Judgment lien

A judgment lien is a lien given in court from a consumer owing a lender money. This lien arises from a legal claim and can be determined by a judge. 

How do you get rid of a lien?

In most cases, a lien is removed by paying off the debt attached to it. When the entirety of the debts are paid off, the lien is released, and the asset is freed. 

In rare cases with legal questioning, where a lender and customer disagree about the end result, the lien might have to be removed in court.

What is a lien holder? 

A lienholder is a lender who holds the right to your items. In the case of the car, the lienholder owns the rights to your vehicle. In the tax example, they have the right to your house. 

Removing a lienholder is the same as removing a lien. Paying off the debt!

Liens and loans and expenses, oh my! 

So, with a little explanation, liens are understandable. At the end of the day, a lien is a legal term used to describe a property you put at risk while paying off your debts. 

When it comes to your financial interests, liens can feel like another straw on the camel’s back. But we’re here to calm you down. Liens are natural, everyday occurrences. In fact, everybody has them.

Liens don’t have to be avoided. You’ll often have to initiate a lien to go through with payment. Though they might sound intimidating, they’re usually needed to start acquiring property.

The good news is so long as you pay off your debts, you don’t have to worry about your lien at all.

Luckily, liens won’t hurt your credit score. Only neglecting to pay the bills will. In the meantime, focus on developing a good credit score and continuing to build a thorough knowledge of the financial world.

Finances are mad stressful. At EXTRA, we’re committed to getting you the information to help you forge your path. We hope that when you run into a lien, you know just what to do to walk away unscathed. 

What in the World is a Lien?

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