What are 'Encumbered Securities'

Encumbered securities are securities that are owned by one entity, but subject to a legal claim by another.

When an entity borrows from another, legal claim on the securities owned by the borrower can be taken as security by the lender should the borrower default on its obligation. The securities' owner still has title to the securities, but the claim or lien remains on record. In the event that the securities are sold, the party with the legal claim on them must be given first opportunity to be paid back. In some cases, encumbered securities cannot be sold until any outstanding debts belonging to the owner of the securities are paid to the lender who holds claim against the securities.

BREAKING DOWN 'Encumbered Securities'

Just as a house may be used as collateral for a mortgage, securities may be used as collateral for borrowing. While the title does not change hands, what the owner can do with the asset or proceeds from the sale of the asset is limited by the extent of the lien on the assets.

Example of Encumbered Securities

For example, if Joe owns shares of ABC stock and wants to borrow money using those shares as collateral, those shares would then be considered encumbered. Depending upon the terms of the lender, Joe may not be able to sell the shares until the loan has been paid back. Or, if he does the proceeds may have to go to pay back the loan first before Joe uses them for anything else. If Joe defaults on the loan, the lending entity may take possession of the ABC shares to compensate for Joe's failure to pay back the loan.

Contrast with "unencumbered."

RELATED TERMS
  1. Collateral Value

    A collateral value is the estimated fair market value of an asset ...
  2. Security Agreement

    A security agreement is a document that provides a lender a security ...
  3. Securities Lending

    Securities lending is the act of loaning a stock, derivative ...
  4. Perfected Lien

    A perfected lien is a lien that has been filed with the appropriate ...
  5. Secured Creditor

    A secured creditor is any creditor or lender associated with ...
  6. Unencumbered

    Unencumbered refers to an asset or property that is free and ...
Related Articles
  1. Personal Finance

    What Is Collateral?

    Collateral is property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup ...
  2. Investing

    Equity Stripping Leaves Creditors Empty-Handed

    Add additional debt to your real estate assets to keep the creditors at bay. Learn about debt- and corporate-entity-based strategies for protecting your assets.
  3. Personal Finance

    Car Title Loan Requirements

    Here's a list of what you need to qualify for a car title loan. Most important: having sole ownership of your car with no liens.
  4. Personal Finance

    States That Allow Car Title Loans

    Only some states permit car title loans – and those that do may have restrictions. Check this list to see what to expect.
  5. Personal Finance

    The 4 Worst Ways To Borrow Money

    While there are less risky places from which to borrow, there are also predatory lenders who can make your financial situation worse than it was to begin with.
  6. Small Business

    Using Collateral to Obtain a Loan for Your Small Business

    Learn what assets can be used as collateral for an asset-based loan, and find out best practices when seeking asset-based lending.
  7. Investing

    Commercial real estate loans

    Obtaining a commercial real estate loan is quite different from borrowing for residential real estate. Here's what to expect and how to get what you need.
  8. Investing

    Financing Basics For First-time Homebuyers

    If you're looking to get your first mortgage, there are many financing options available.
  9. IPF - Mortgage

    What Are the Main Types of Mortgage Lenders?

    Shopping for a mortgage lender can feel confusing and a little intimidating. Understanding the differences among the main types of lenders can help you narrow down the field.
  10. Investing

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
RELATED FAQS
  1. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ... Read Answer >>
Trading Center