Written byAn encumbrance is a claim someone else holds over an asset, such as a loan secured against it, that limits how freely it can be sold.
Also known as: encumbered asset, registered interest, charge over an asset
Key points
- On vehicles and equipment the encumbrance is normally a security interest registered on the Personal Property Securities Register.
- On real estate it can be a mortgage, caveat, easement, covenant or statutory charge recorded on the title.
- An encumbered asset can still be sold, but the debt is usually cleared and the registration removed at settlement.
- Buying an encumbered car privately is risky, because the financier's claim can follow the vehicle to you.
- A lien is one form of encumbrance: the right to hold goods until an amount owing is paid.
How an encumbrance works
When a lender finances an asset it registers its interest against that asset, and that registration is the encumbrance. It does not stop you using the ute or the machine, and under a chattel mortgage it does not change who owns it. What it does is put everyone else on notice: anyone who searches will find the claim, and a buyer who proceeds without clearing it takes on the risk.
The claim stays in place until it is discharged. On final payment the lender releases its interest, or you ask for a discharge if that does not happen automatically. Until then the asset is described as encumbered, and dealers, financiers and anyone doing due diligence on the business will treat it that way.
Property and goods
Encumbrances over land sit on the certificate of title in each state: mortgages, caveats, easements, covenants and statutory charges such as unpaid rates. A title search brings them up, and much of conveyancing exists to sort them out before settlement.
Goods work differently. Vehicles, trailers, plant, machinery and even stock are recorded on the Personal Property Securities Register. A search by VIN or serial number, or against the owner's ABN or ACN, shows what is registered. Buyers, financiers and insurers run those searches as a matter of routine before money changes hands.
Why it matters when you buy or finance
A lender will rarely advance against an asset carrying somebody else's claim, so an existing encumbrance has to be paid out and released as part of the deal. That is routine on a trade in or a refinance: the current financier provides a payout figure, it is settled from the new funds, and the registration comes off.
For private buyers the stakes are higher. Buy a car that still carries a registered interest and the financier may be able to recover it from you, even though you paid the seller in full. A register search costs a small fee, takes a minute, and produces a certificate showing you checked.
Example
A courier company sells a $45,000 van that still has $12,000 owing on it. The buyer's financier searches the register, finds the registration, and makes the payout a condition of settlement. On the day, $12,000 of the price goes to the existing financier, the balance goes to the seller, and the old registration is removed. The van changes hands with nothing hanging over it, and the buyer's lender registers its own interest in place of the previous one.
Not to be confused with
- Lien
- the right to keep goods until an amount is paid, which is one type of encumbrance
- Security (collateral)
- the lender's legal interest, where the encumbrance is the burden that interest puts on the asset
Frequently asked questions
What does it mean if a car is encumbered?
It means money is still owing on it and a financier has registered an interest against the vehicle. The seller can still sell it, but the debt normally has to be paid out at settlement so the registration can be removed and the buyer gets clear title.
How do I check if an asset is encumbered?
For vehicles and equipment, search the Personal Property Securities Register by VIN or serial number, or against the owner's ABN or ACN. For property, order a title search in the relevant state. Both produce a certificate you can keep as evidence of the check.
Can you sell an encumbered vehicle?
Yes, but the finance is usually cleared as part of the sale. Ask your financier for a payout figure valid on the settlement date, then direct that amount from the sale proceeds to them. Once paid, the financier discharges its registration and the buyer takes clear title.
How do I remove an encumbrance?
Pay out the underlying debt and ask the holder to discharge the registration. Some lenders do this automatically on final payment; others need a request. Search the register afterwards to confirm it has actually come off, because a stale registration can hold up a later sale.
What is the difference between an encumbrance and a lien?
Encumbrance is the broad word for any claim limiting an asset, including mortgages, caveats, easements and registered security interests. A lien is one specific type: the right to hold onto goods until an amount owing is paid, such as a mechanic keeping a vehicle until the repair bill is settled.
Related terms
Security (collateral)
Security (collateral) is an asset or legal interest a borrower grants a lender, which the lender can take and sell to recover the debt if the borrower defaults.
Read definitionLien
A lien is a legal right a creditor holds over another person's property, such as goods or land, as security until a debt is paid.
Read definitionMortgage
A mortgage is the legal charge a lender registers over property to secure a loan, giving it the right to sell the property if you default.
Read definitionChattel mortgage
A chattel mortgage is a business loan for a vehicle or equipment: you own the asset from settlement and the lender holds a security interest until it is repaid.
Read definitionRepossession
Repossession is the enforced recovery of goods that secure a loan, such as a car, ute or machinery, after the borrower has defaulted on the contract.
Read definitionCollateral risk
Collateral risk is the chance that an asset pledged as security fails to cover the exposure because it falls in value, cannot be sold quickly or cannot be enforced.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.