Legal Definitions - PMSI

PMSI stands for Purchase-Money Security Interest.

A Purchase-Money Security Interest (PMSI) is a special type of legal claim a lender or seller can have on property. It arises when a loan or credit is specifically used by a buyer to purchase particular goods, and the lender or seller then takes a security interest (a legal right) in those very goods to ensure the buyer repays the debt. Essentially, the money provided by the lender or seller is the "purchase money" that enables the buyer to acquire the item, and that item then serves as collateral for the loan.

Here are some examples to illustrate how a PMSI works:

• Example 1: Buying a New Vehicle

  Imagine Sarah wants to buy a new car from a dealership. She doesn't have enough cash, so she takes out a loan from a bank that partners with the dealership. The bank provides the funds *specifically* for Sarah to purchase that particular car. In return, the bank takes a security interest in *that new car*. If Sarah fails to make her car payments, the bank has a legal right to repossess *that specific car* because its loan was the "purchase money" for the vehicle, and the car itself is the collateral.

• Example 2: Financing Business Equipment

  A small bakery, "Sweet Treats Inc.," needs a new, high-capacity industrial oven to expand its production. They secure a loan from a commercial lender *solely for the purpose* of buying this specific oven. The lender then takes a security interest in *that new industrial oven*. This is a PMSI because the loan directly funded the acquisition of the oven, and the oven itself serves as the collateral. If Sweet Treats Inc. defaults on the loan, the lender has a priority claim to that specific oven, allowing them to repossess or sell it to recover their funds.

• Example 3: Acquiring Retail Inventory

  A clothing boutique, "Fashion Forward," wants to stock a new line of designer handbags from a wholesaler. The wholesaler offers the boutique credit to purchase these specific handbags, taking a security interest in *that new inventory of handbags* until Fashion Forward pays for them. This arrangement creates a PMSI. The credit provided by the wholesaler is the "purchase money" for the handbags, and the handbags themselves are the collateral. This gives the wholesaler a strong claim on those specific handbags if the boutique fails to pay, even if the boutique has other creditors.