Purchase-money security interest (PMSI) refers to security interests in purchase-money collateral. Purchase-money collateral is the collateral that was purchased completely or in part by the debtor with the funds given to create a security interest in the collateral. For example, if a bank granted a business a loan in order to buy a machine and the machine was collateral for the loan, the machine would constitute purchase-money collateral, and the bank would have a PMSI in the machine.
PMSI interests become important during insolvency of the debtor because PMSI holders often have more senior interests in the collateral than other security interests and creditors (see U.C.C. § 9-324 for requirements and exceptions). In fact, a PMSI perfected within the timeframe of § 9-324 will rank above other security interests even if perfection occurs later in time. When debtors become insolvent, their creditors often will fight over assets. Creditors with a PMSI in collateral typically will get the money from the liquidation of those assets before other creditors. Also, PMSI in consumer goods and sometimes in other assets have the benefit of being perfected automatically.
[Last updated in October of 2023 by the Wex Definitions Team]
- Keywords