What is the primary purpose of a lien when you obtain a secured loan?

• A. To eliminate the need for a credit check
• B. To give the lender a legal claim to the collateral if the borrower defaults
• C. To increase the interest rate on the loan
• D. To transfer ownership of the collateral to the borrower immediately

Answer: (B)

Verified step by step guidance

1. Understand the concept of a lien: A lien is a legal claim or right against an asset that is used as collateral to secure a loan. It ensures that the lender has a legal claim to the collateral if the borrower fails to repay the loan.
2. Recognize the purpose of a secured loan: A secured loan is backed by collateral, which reduces the lender's risk. The lien is the mechanism that allows the lender to enforce their claim on the collateral.
3. Analyze the options provided in the question: Evaluate each option to determine which aligns with the purpose of a lien. For example, eliminating the need for a credit check is not related to the function of a lien.
4. Focus on the correct answer: The primary purpose of a lien is to give the lender a legal claim to the collateral if the borrower defaults. This ensures the lender can recover their losses by taking possession of the collateral.
5. Conclude by understanding the implications: A lien does not increase the interest rate, transfer ownership of the collateral immediately, or eliminate the need for a credit check. Its sole purpose is to protect the lender's interest in the event of default.