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What is a Security Interest?

Charity Delich
Charity Delich

A security interest is a type of property right that is frequently given to one party by another party as collateral for the performance of an obligation. Security interests are most commonly used in situations in which debtors have borrowed money from lenders. In this type of scenario, a security interest helps make certain that the loan will get repaid. With most kinds of security interests, a creditor has the ability to claim all or part of the property offered as security if the debtor fails to make a payment.

Personal property, such as a car, jewelry, or other assets, can be the subject of a security interest. When a debtor takes out a car loan, for example, he or she commonly gives the lender a security interest on the car. If the debtor fails to make payments on the car and the lender has a security interest on the car, the lender has the right to take back the car. The lender may then sell the car to someone else in order to pay off the outstanding balance on the car loan.

Woman holding a book
Woman holding a book

Real property can also be the subject of security interests. When a homeowner secures a mortgage on her house, she usually gives the bank or other lender a security interest in the house as collateral to ensure that she repays the loan as required by the mortgage agreement. If the homeowner defaults on her payments, the bank usually has the right to foreclose on the house and resell it.

A floating charge is a type of security interest that is taken out by a lender over a borrowing company’s assets in order to secure the company’s repayment of a debt obligation. In general, the lender does not have a right to the assets until an event called crystallization occurs. Crystallization can occur upon a triggering event, such as the company failing to make payments or the company filing insolvency proceedings. At that point, the lender has the ability to take over control of certain company assets.

A security interest is different from a debenture, which is a type of unsecured debt instrument. Debentures are often given out by a company or a government in the form of a bond issued for the purpose of securing capital for a project. People who purchase debentures generally trust that the issuer is solvent and reliable and that the issuer will not default on the debt. If the issuer defaults, the purchaser does not have any collateral and loses out on the investment.

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