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A security agreement is a contract which provides a lender with a security interest in the form of a lien on property owned by the borrower. In cases in which the borrower defaults on his debt, this security interest allows the lender to sell the property in order to satisfy the debt. When a loan is backed with a security agreement, it is said to be a secured loan. For lenders, secured loans are less risky than unsecured loans.
In a security agreement, the object of the security interest must be clearly described. It can be a physical asset, such as a home or a car, or an intangible asset, like a bank account. In some cases, the lender may even retain control of the asset, as for example when stock certificates are used to secure a loan and the lender holds them until the loan is repaid, at which point they are released. The lender's lien on the property must be recorded on the title and other documents pertaining to the property.
The borrower also needs to have the right of ownership to the property being used to secure the loan. This prevents situations in which property which does not belong to someone is pledged as collateral for a loan without the awareness or consent of the owner. The security agreement must bear the borrower's signature or an electronic mark to indicate that the borrower is aware of the agreement and has consented to it.
Mortgages and car loans are often secured transactions, with the subject of the transaction acting as the security. Other types of transactions can also be backed with a security agreement. The terms on such transactions tend to be more favorable for the borrower because the lender can afford concessions, such as a lower interest rate. Unsecured transactions are accompanied with less favorable terms as the lender has fewer options in the event of a default.
The terms of a security agreement should be reviewed carefully. The document may include clauses which could be a cause for concern later, and it can also include discussions about the loan terms which are important to understand. The security agreement should also provide information about what happens if the borrower wants to sell the asset being used to secure the loan. Usually such sales require the consent of the lender, and the proceeds of the sale must be directed to paying off the loan.
@indemnifyme - You bring up a good point, but sometime putting up collateral is the only way to get a loan. I suppose it depends on the situation.
I can personally see why this would be a good idea for both the customer and the lender. The lender has more peace of mind, and the customer can get a lower interest rate. I think it is a fine idea, as long as you're planning to make your loan payments!
It makes sense that only something the borrower actually owns can be used in a security agreement. We have a similar principle in insurance called "insurable interest." This basically means you can only insure something that you actually own.
As far as security agreements, I think they make the most sense for a consumer if the collateral is the object of the loan. If you default, you just lose that. However, if you take out a loan on something else, and put your house up for collateral and you default, you lose your house and all the money you paid in loan payment.
I think I would really think twice before securing a loan with one of my assets.
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