What is a Secured Transaction?

In business, different types of transactions are entered into. One of the most common transactions that occurs is when a lender or creditor makes a loan to a borrower.  The two parties enter into a contract for the transaction. The lender gives the debtor money and the contract specifies the terms and conditions under which the debtor must repay the loan. secured transaction

When a lender gives a borrower a loan or extends credit and the debtor pledges collateral to guarantee that the loan will be paid back, this is a special type of loan transaction that is called a secured transaction. The lender is better protected in a secured transaction because the lender can take the collateral in the event of a default. Secured transactions can also be beneficial for the debtor because the lender is typically willing to loan money at a lower interest rate because there is less risk.

What is a Secured Transaction?

The term secured transaction can apply to any transaction based upon a security agreement. The security agreement is a provision in the contractual agreement between the borrower and the lender. The security agreement specifies that the creditor has an ownership interest in property, called collateral, that is held by the debtor. The debtor gets to keep the property as long as he pays the loan payments as required by the contract between the debtor and lender. If the debtor defaults and does not pay, then the creditor is protected because the creditor can take the property if the terms of the transaction are not fulfilled.

Secured transactions are common in business, but two of the most well-known types of secured transactions involve car loans and home mortgages. In the case of the car loan, the lender will keep the title to the vehicle and the car will act as collateral. Until the loan is repaid in full, the lender can exercise the security interest in the vehicle and can repossess the car if payments are stopped. In the case of a home mortgage, the homeowner does not get the deed to the home solely in his name until the lender has been repaid. The home acts as collateral and the lender can foreclose and take the house if the mortgage payments are not made  by the debtor.

Depending upon the terms of the agreement, a security interest typically can be transferred or assigned to a third party. The lender, for example, could give the security interest in the home to a different mortgage company. The party that receives the assignment of the security interest would become the new secured party and the original creditor would not longer have a claim on the collateral.

Secured transactions are governed by Article 9 of the Uniform Commercial Code and it is very important to understand the laws related to these transactions and how they apply to you. A San Diego business lawyer at Sepahi Law Group, APC can help you to understand the meaning and implications of security agreements and can advise you before you enter into any type of loan contract. Call today to learn more.

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