A lien is a legal claim to an underlying asset that has been set forth as collateral to secure a debt or some other financial obligation, such as an outstanding tax payment. The primary difference between a possessory and a non-possessory lien is based on the entity which retains possession of the underlying collateral securing a loan during the period of repayment.
What Is a Possessory Lien?
A possessory lien occurs when the lender (or recipient of the payments due from an obligation) retains physical possession of the underlying collateral. The lender has the legal right to retain the collateral until the obligation is retired or other conditions are satisfied.
A pawnbroker is a common example of an instance where a possessory lien is part of the transaction. An individual may give possession of personal jewelry to a pawnbroker in exchange for a loan. The jewelry, while still owned by the borrower, acts as collateral and remains in the possession of the pawnbroker until the loan has been successfully repaid.
While a possessory lien could eventually be used to claim legal ownership of the collateral – in the event of default – a lien on an asset or piece of property does not in itself grant ownership despite the lender retaining possession of the collateral. The possessory lien is still a contingent claim on ownership encumbering the asset. The borrower legally owns the collateral unless there's a legal reason for the lender to claim ownership under the lien.
What Is a Non-Possessory Lien?
In contrast, a non-possessory lien is a structure in which the borrower or obligor has the right to retain possession of the collateral securing a loan. This structure is considerably more common to consumers in the United States.
Examples wherein non-possessory liens are employed include residential real estate mortgages, auto loans and consumer credit debts. In all cases, the borrower/buyer of the property retains ownership and possession during the repayment period.