Legal Definitions - purchase-money interest

A purchase-money interest, often referred to as a purchase-money security interest, is a special type of legal claim a lender or seller has on an item that was purchased with the money or credit they provided. Essentially, if you borrow money specifically to buy a particular asset, and that asset then serves as collateral for the loan, the lender holds a purchase-money interest in that asset. The defining characteristic is that the loan or credit directly enabled the buyer to acquire the specific property.

This type of interest is significant because it establishes a direct link between the funds provided and the acquisition of the collateral. It gives the lender a claim on the specific item they helped finance, ensuring that if the borrower defaults, the lender can recover the item to satisfy the debt.

• Example 1: Consumer Appliance Financing

  Imagine Maria wants to buy a new washing machine from an appliance store. The store offers her an in-house financing plan. Maria signs an agreement stating that the money she borrowed from the store is specifically for the washing machine, and the washing machine itself will serve as collateral for the loan until it's fully paid off.

  How it illustrates the term: The appliance store has a purchase-money interest in Maria's washing machine. The credit provided by the store was used *solely to acquire* that specific washing machine, and the machine itself secures the debt.

• Example 2: Vehicle Loan

  John needs a car for his daily commute. He obtains a loan from a bank to purchase a specific new sedan from a car dealership. The loan agreement clearly states that the funds are to be used for the purchase of that particular vehicle, and the car itself will be the collateral for the loan.

  How it illustrates the term: The bank holds a purchase-money interest in John's new sedan. The loan funds were provided *for the express purpose* of buying that specific car, and the car then serves as security for the repayment of the loan.

• Example 3: Business Equipment Acquisition

  A small graphic design firm, "Creative Canvas LLC," needs a high-end commercial printer to expand its services. They secure a loan from a specialized equipment financing company. The loan contract specifies that the funds are exclusively for the purchase of the new printer, and the printer itself will act as collateral for the loan.

  How it illustrates the term: The equipment financing company has a purchase-money interest in the commercial printer. The loan was provided *specifically to enable* Creative Canvas LLC to acquire that particular piece of equipment, and the printer secures the debt, directly linking the financing to the acquisition of the asset.