Posted on December 15, 2020
Lenders have several ways to protect their financial interests if debtors do not meet their financial obligations. Financial firms may be able to sue consumers who no longer pay their debts by sending them into recovery, taking legal action, imposing pawn fees or taking special interests, such as monetary security. These interests give a particular lender a property right or its total value before any other creditor – as long as that lender`s money has been used to finance the purchase. The protection of a PMSI is one of the reasons for the growth of point-of-sale financing, in which a retailer offers buyers direct financing for major purchases. If the buyer is late in payment, the merchant can recover the purchased goods and do so before other creditors are satisfied. The rules for a lender`s use of a PMSI are strict. These guidelines are outlined in the UCC. The lender must be able to prove that the seized property belonged to the lender and was purchased with the lender`s money. For this reason, lenders regularly pay sellers for the goods before arranging their sale on credit to a buyer. This justifies the lender`s ownership of the goods concerned.
For example, if a consumer agreed to purchase a custom sofa on credit from a furniture dealer, the retailer would place an order with the manufacturer and pay for the sofa before entering into the financing contract. In this case, the retailer is the owner who sells the sofa, not the manufacturer. From a legal point of view, the retailer has an interest in the security of the property sold and can obtain and enforce a PMSI. A PMSI is used by some commercial lenders and credit card issuers, as well as by retailers that offer financing options. It gives them effective guarantees to confiscate when a borrower is late with the payment of a large purchase. It is also used in business-to-business (B2B) transactions. The ability to obtain a PMSI encourages companies to increase revenue by directly financing new equipment or inventory purchases. Procedures for the application of a PMSI are strict and defined in the single trade code. A sale money security interest applies in most legal systems as soon as the buyer approves it in writing and the lender files a financing statement. The procedure is described in Article 9 of the Single Trade Code (UCC) – the standardised trade rules adopted by most states.
These regulations have been adopted to make it easier for companies to conduct transactions with other companies across national borders. Section 9 is the part of the code describing the handling of secure transactions, including how security interests are created and enforced. The concept of a Purchase Money Guarantee (PMSI) refers to a right that allows a lender to either recover real estate financed by its loan or to require cash repayment in the event of a borrower`s late payment. It gives priority to the lender over the receivables of other creditors. Simply put, a PSMI gives companies that finance the purchases of a consumer or other debtor the first property rights.