Voluntary Lien: What It Is, How It Works

What Is a Voluntary Lien?

A lien is a claim that one person or other entity has over the property of another as security for the payment of a debt. Liens can be either voluntary or involuntary. A voluntary lien is contractual or consensual, meaning that the lien is created by an action taken by the debtor, such as a borrower who obtains a mortgage to buy a home and agrees that the home will serve as collateral for the loan. That's opposed to an involuntary lien, which is imposed on the debtor by, for example, a court of law, without their say-so.

How Voluntary Liens Work

A lien is a legal claim to an asset under certain conditions. A voluntary lien is a type of lien that exists because you agreed to it, or as a result of an action taken by you.

In contrast, an involuntary lien is one imposed by law, such as a tax lien that is initiated by the government for a failure to pay taxes.

When there is a lien against your property, you cannot legally sell it until you settle the amount you owe.

Liens apply to specific property, not to you personally. If you default on a debt, the lien holder can take possession of the property in question. For example, a lender can take your home if you default on a mortgage you used to secure it or your car if you default on an auto loan.

How Voluntary Liens Are Applied

Voluntary liens are often used for mortgages to purchase real estate, but they can also be used in many other types of financing, such as car loans, secured personal loans, business loans, credit agreements, and even rent-to-own appliance transactions.

Typically, the physical property that the borrower is purchasing acts as collateral under the lien. However, a voluntary lien can also be placed on other property that the borrower already owns if the borrower agrees to it. For instance, a lien could be placed on a valuable painting if the borrower uses it as collateral for a cash advance to fund another purchase.

Or, a homeowner who has paid off their mortgage and owns their house outright might need more cash and allow a lien on it in order to obtain a home equity line of credit (HELOC). Just as with a mortgage for a home purchase, the house would serve as collateral.

Finally, a business could have a voluntary lien on it if the business owner takes out a line of credit to cover operating expenses or other costs. In this case, the lender would not take possession of the business if the borrower defaults but instead receive a security interest in it.

Voluntary Liens vs. Involuntary Liens

An involuntary lien, or a nonconsensual lien, is one that is imposed on you instead of one you consent to. Two types of involuntary liens are statutory liens and judgement liens.

When the law gives a creditor the right to impose a claim on your property for an unpaid debt, that is a statutory lien. One common type of statutory lien is a tax lien, in which the government has the right to seize your property if you fail to pay a tax bill.

A judgement lien occurs when a court rules that a lien should be placed on your property to satisfy your obligations to creditors. For example, if your insurance does not cover all of the damages you are responsible for in an accident, a court might impose a judgement lien.

The Bottom Line

Voluntary liens are common in many financial transactions and, unlike involuntary liens, will have no negative impact on your credit as long as you keep up with your loan obligations. However, they do put your property at risk if you are unable to repay, so you'll want to consider that possibility before you consent to one.