What Is a Secured Party?

Malcolm Tatum

A secured party is any party who holds an asset as a pledge or collateral associated with a debt owed to that party. This individual or entity may be some type of lender, including a bank, private lender, or a finance company. Sellers who choose to finance the purchase of goods for their buyers also fit into this category, assuming that some sort of lien exists on an asset owned by those buyers that remains in force until the debt is paid in full.

Man climbing a rope
Man climbing a rope

Secured parties involve just about any type of lender or seller who chooses to make use of a business model that requires buyers provide some sort of collateral as part of the terms for financing the purchase of an asset. In many instances, the purchased asset does serve as the collateral or security interest for the loan. For example, a mortgage lender may accept the real estate purchased with the loan as the security or the collateral for that loan. In the event that the buyer stops making payments on the debt, the secured party has the right to declare the loan in default, initiate foreclosure proceedings, gain control of the pledged asset, and sell that asset at a liquidation sale.

One of the benefits of a secured party arrangement is that lenders, sellers, and other types of obligees possess some additional protection from the negative outcomes of a default on the debt owed by the buyers. This often makes it possible to take on business deals that would otherwise be considered too risky, based on the past credit performance of the debtors involved. With a secured party, that past performance is still very important to the lending process, but is tempered slightly by the fact that the pledging of collateral increases the chances of the lender being compensated in full even if the debtor becomes unable or unwilling to honor the debt obligation.

The laws and regulations governing the ability to function as a secured party vary from one country to the next. Within the scope of the regulations that apply in a specific jurisdiction, lenders and sellers may have to meet specific criteria in order to require the pledging of some type of collateral as part of its credit and lending practices. Most jurisdictions also require compliance with regulations that help to set reasonable efforts on the part of the seller or lender before declaring the debt to be in default and attempting to foreclose on the pledged asset.

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