What is a purchase money security interest (PMSI)?

A purchase money security interest (PMSI) is defined as a security interest that is established when a secured party extends credit to a buyer to purchase specific goods and then takes a security interest in those exact goods. In other words, the PMSI arises when a lender provides financing specifically for the acquisition of the collateral itself, allowing the buyer to purchase the property while giving the lender a security interest in that property.

This definition is essential in secured transactions because a PMSI has certain priority rights over other types of security interests in the same collateral. When a lender has a PMSI, the law often grants them priority in bankruptcy situations or in disputes over the collateral with other creditors, making them a significant tool for secured creditors in ensuring they are repaid in case the borrower defaults.

Options that do not correctly represent a PMSI include personal loans that do not tie directly to specific purchased goods, types of insurance related to securing debts, and interests resulting from services rendered, none of which accommodate the specific transactional nature of a PMSI facilitating a purchase of collateral.