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Security Agreement

Security Agreement

A security agreement is a contract governs the relationship between the parties involved in a secured transaction. In a secured transaction, the lender acquires a security interest in collateral owned by the borrower. If the borrower defaults, the collateral can be seized and sold by the lender. For example, if you purchase a car on credit and you fail to make your payments on time, the lender can take the car and resell it. Repossessing the car. A security agreement mitigates the risk that a lender takes. Article 9 of the Uniform Commercial Code (U.C.C.) governs secured transactions in personal property, but not in real property. When a loan is backed by a security agreement, it is called a secure loan. As you can probably guess, secured loans are less risky than unsecured loans for lenders.

Interestingly, a security agreement can be oral, if the lender has physical possession of the collateral. If the borrower retains possession of the collateral, or if it is intangible, the agreement must be in written form. The security agreement must be authenticated, either by the borrowers signature or an electronic mark. There are many security agreement forms available for purchase from legal and bank supply companies. You can also buy software that can make security agreements tailored to your specifications.

In a security agreement, the object of the security interest must be clearly defined. The lender’s lien on the property should be included in the title and other documents related to the property. It could be a physical asset like a home, property, or car. It could also be an intangible such as a bank account. In some cases, the lender can control an asset until a loan is repaid, at which point it will be released.

The borrower needs to have right of ownership to the property being used to secure the loan. That way, the borrower cannot pledge a property as collateral that he or she does not actually own. The terms on secured transactions are favorable for the borrower because the lender can afford a lower interest rate. Unsecured transactions are associated with less favorable terms because the lender has fewer options if the borrower defaults.

If you wish for a security interest to attach to collateral that could be sold, it must be perfected. If the agreement is for a purchase money security interest, it is automatically perfected. In any other case, the lender is required to record the agreement or a financing statement. Perfecting interest creates something called constructive notice, which informs others of the lender’s right to the collateral.

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