purchase-money collateral

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Purchase-money collateral refers to 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 debtor granted an appliance store a security interest on a new television that they bought with installment payments, the television would be purchase-money collateral for the security interest of the appliance store. 

Purchase-money collateral becomes important when a debtor becomes insolvent because the holder of the security interest in the purchase-money collateral has a purchase-money security interest (PMSI), which may give them priority over other creditors. 

[Last updated in October of 2023 by the Wex Definitions Team]