In Rem Rights vs In Personam Rights

In order to secure an asset as an item of collateral, a lender must first secure a right to access against the property itself. This right describes a claim against the asset, as well as the circumstances under which the asset can be collected. These claims are categorized under two main types: In Rem, and In Personam. Both of these types of claims represent a different sort of agreement, and help to illustrate the difference between a collateral debt and a personal loan.

The most common types of claims that a bank will submit are In Rem. In Rem claims are those which are specific to individual assets owned by the borrower. Upon showing that there are no existing claims upon the asset, it becomes a piece of security against a loan, and helps to improve the quality of the loan. By filing an In Rem claim against a specific asset, a client is agreeing to give the lender what is essentially an ownership claim on the title.

The result of this transaction is that the borrower will not be able to sell the specific asset until the entire obligation has been paid out in full. In exchange, the bank will provide more favorable lending terms because they are able to better calculate the stability of the loan-to-borrower-value. While this might not sound like a particularly meaningful measure to calculate, it provides a great deal of worth to the lender by ensuring that the borrower will not be quietly selling assets off behind the lender’s back.

When a borrower is looking to pursue a smaller loan, or perhaps already has a strong borrowing history, the lender will likely only purse In Personam rights to secure a loan. In Personam rights provide a given lender with the right to sue an individual in the event of default. Under a successful law suit, the court may order the liquidation of any assets held by the borrower for the purpose of paying out the loan.

This essentially means that a borrower is explicitly giving a bank the right to sue them should they default on a loan. Indirectly, this gives the bank a claim to all of the assets controlled by the individual. However, there is no restriction that prevents the borrower from selling any of their assets throughout the term of the loan. It is therefore not uncommon for delinquent borrowers to have already sold all of their assets by the time the suit can actually take place.

So what does all of this mean to us as borrowers? It means that we need to be aware of exactly what kind of claim it is that our lenders have upon our assets, and how it is that we have agreed to allow the bank collect in the event of delinquency. Has an asset been secured through In Rem rights? If so, we’re stuck with that asset until we can get rid of the loan. Has the bank granted us a personal loan based on reputation alone? If so, we might want to make sure that we’re on top of those payments, so as to not wind up in the middle of a law-suit.