Security Interest

Security Interest

A security interest is a legal claim or lien granted by a borrower to a lender over the borrower’s property, which secures the repayment of a debt or the performance of an obligation. This interest gives the lender a right to take possession of the collateral in the event of default by the borrower.

There are two primary types of security interests:

1. Possessory Security Interest: This type requires the lender to take possession of the collateral to secure the loan. For example, if a borrower takes out a loan and provides their car as collateral, the lender may hold the car until the loan is repaid.

2. Non-Possessory Security Interest: This type allows the borrower to retain possession of the collateral while still providing the lender with a claim against it. A common example is a mortgage, where the lender has a security interest in the property but the borrower continues to live in it.

Security interests are typically governed by the Uniform Commercial Code (UCC) in the United States, which outlines the procedures for creating, perfecting, and enforcing these interests. To "perfect" a security interest means to make it legally enforceable against third parties, often through filing a financing statement or taking possession of the collateral.

In the event of a borrower’s default, the lender may enforce their security interest by taking possession of the collateral, selling it, and applying the proceeds to the outstanding debt. This process is often referred to as "repossession" in the case of personal property or "foreclosure" in the case of real estate.