What Is a Security Interest?

Security interest is an enforceable legal claim or lien on 澳洲幸运5官方开奖结果体彩网:collateral that has been pledged, usually to obtain a loan. The borrower provides the lender with a security interest in certain assets, which gives the lender the right to repossess all or part of the property if the borrower stoꩲps making loan payments. The lender can then sell the repossessed collateral to pay o🐟ff the loan.

Understanding a Security Interest

Securing interest on a loan lowers the risk for the lender and, in turn, allows the lender to charge lower interest, thereby lowering the 澳洲幸运5官方开奖结果体彩网:cost of capital for the borrower. A transaction in whic💛h a security interest is ꦫgranted is called a “secured transaction.”

Granting a security interest is the norm for loans such as auto loans, business loans, and mortgages, collectively called 澳洲幸运5官方开奖结果体彩网:secured loans. Credit cards, however, are classified as 澳洲幸运5官方开奖结果体彩网:unsecured loans. The credit card company will not repossess the clothes, groceries, or vacation you purchased with the card on which you default. 澳洲幸运5官方开奖结果体彩网:Signature loans are another example of unsecured loans. The mꦫain difference between these twജo types of loans is the absence or presence of collateral.

The 澳洲幸运5官方开奖结果体彩网:Uniform Commercial Code (UCC)🌳 specifies three requirements for a security interest to be legally valid,🌺 a process known as “attachment.”

1. The security interest is given a value.
2. The borrower owns the collateral.
3. The borrower has signed a 澳洲幸运5官方开奖结果体彩网:security agreement.

Further, the collateral must be specifically described in the security agreement. For example, the security listed in the loan agreement might specify the borrower’s 🔥2013 Honda Accord, not “a🦩ll of the borrower’s vehicles.”

The lender must also “perfect” its security interest to make sure no other lender has rights to the same collateral. A perfected security interest is any secure interest in an asset that cannot be claimed by any other party. The interest is perfected by registering it with the appropriate statutory authority, so that it is made legally enforceable and any subsequent claim on that asset is given a 澳洲幸运5官方开奖结果体彩网:junior status. As a note, a 澳洲幸运5官方开奖结果体彩网:deed of reconveyance proves that a bank no longer has a security interest over a property.

Examples of Security Interests

Let’s say Sheila borrowed $20,000 to buy a car and stopped making payments when her loan balance was $10,000 because she lost her job. The lender repossesses her car and sells it at auction for $10,000, which satisfies Sheila’s loan balance. Sheila no longer has her car, but she also no longer owes the lender any money. The lender no longer has a bad loan on its books.

Another situation in which a lender might require the borrower to grant a security interest in assets before it will issue the loan is when a business wants to borrow money to purchase machinery and equipment. The business would grant the bank a security interest in the machinery and, if the business is unable to make its loan payments, the bank would repossess the machinery and ﷽sell it to recoup the money it had lent. If the business stopped paying its loan due to bankruptcy, its secured lenders would have precedence over its unsecured lenders in making claims on its assets.