What is a "purchase money security interest" (PMSI)?

A "purchase money security interest" (PMSI) is a specific type of security interest that arises when a borrower finances the purchase of an item with the help of a lender, typically to acquire goods for personal use or inventory for a business. The defining feature of a PMSI is that it secures the loan used to buy the collateral, meaning that the security interest is taken in the goods for which the loan was made. This allows the lender to have a priority claim over other creditors if the borrower defaults, provided certain conditions are met, such as proper attachment and perfection of the security interest under the Uniform Commercial Code (UCC).

In essence, a PMSI is distinct from other security interests because it directly relates to the specific goods purchased with the financed funds. Understanding this definition and its application is crucial for both buyers and lenders, as it impacts the rights and priorities regarding the collateral in the event of a default or bankruptcy.