Which statement correctly differentiates a security interest from a lien?

Which statement correctly differentiates a security interest from a lien?

• A. A lien is a contractual right in collateral, while a security interest arises by operation of law
• B. A security interest is a contractual right in collateral; a lien can arise by operation of law or contract; both create rights to collateral
• C. A lien has no relation to collateral
• D. A security interest requires court approval to be valid

Answer: (B)

The main idea is how these encumbrances come into existence and what they encumber. A security interest is a contractual right in collateral created by a security agreement between the debtor and creditor; it attaches to the collateral when there is agreement, value, and the debtor has rights in the collateral, and it can be perfected to establish priority. A lien, by contrast, is an encumbrance on property that can arise either by operation of law or by contract (for example, a mortgage or a mechanic’s lien created by statute or agreement). Both create rights against the collateral, but their origins differ: a security interest is strictly a product of a contract, while a lien can arise automatically under law or from an agreement. Therefore the statement that best differentiates them is that a security interest is contractual in nature, while a lien can arise by operation of law or contract.

The main idea is how these encumbrances come into existence and what they encumber. A security interest is a contractual right in collateral created by a security agreement between the debtor and creditor; it attaches to the collateral when there is agreement, value, and the debtor has rights in the collateral, and it can be perfected to establish priority. A lien, by contrast, is an encumbrance on property that can arise either by operation of law or by contract (for example, a mortgage or a mechanic’s lien created by statute or agreement). Both create rights against the collateral, but their origins differ: a security interest is strictly a product of a contract, while a lien can arise automatically under law or from an agreement. Therefore the statement that best differentiates them is that a security interest is contractual in nature, while a lien can arise by operation of law or contract.