What is a Security Interest?

A security interest is a form of property interest in real or personal property. It is given by the owner of the property to provide assurance to a third party that the property owner will perform an obligation or pay a debt. Generally a security interest arises when one party loans money to another party. The borrower provides a security interest in property to give assurance that she will repay the loaned funds. Often the money borrowed is used to purchase the property securing the loan. If the borrower fails to repay the loan, the lender may seek to take possession of and sell the property securing the loan. The proceeds from sale of the property are then used to repay the debt.

Note: The most common types of security interest are mortgages of land and security interests in personal goods under Article 9 of the UCC.

How does the pledge of security interest in the collateral provide additional security to the creditor?

If the debtor fails to repay the debt in accordance with the debt agreement, the creditor may repossess or take possession of the collateral. The creditor may then sell the collateral to obtain cash (liquidate the asset). The creditor may pay expenses of the sale, then apply proceeds to pay off the debt. Any proceeds from the sale left over after paying the debt is returned to the debtor.

The creditors ability to seize and sell the collateral securing the debt provides a great deal of security to the creditor. The secured creditor can feel more comfortable that she will be repaid for the loan or extension of credit made to the debtor. An unsecured creditor cannot directly repossess assets of the debtor who fails to repay the loan or extension of credit; rather, they have to sue the debtor and attempt to recuperate their money through the judicial system.

What is Article 9 of the UCC?

The Uniform Commercial Code (UCC) provides model laws governing commercial transactions in goods. Every state has adopted the UCC, with little change, as the statutory law of the the state. Article 9 of the UCC provides the laws governing security interests and secured transactions. The remainder of this lecture series will reference Article 9 provisions concerning security interests.

What is a Lien and how does it relate to a security interest?

A security interest is a type of lien. A lien is a debt that is specifically attached to an asset and provides the lien holder with a security interest in that asset. A security interest generally arises at the time of lending money through agreement. A lien, however, may arise through a number of methods. Other examples of liens include:

• Mechanics Liens
• Materialmans Liens
• Judgement Liens

For example, a mechanics lien arises when a workman performs services on the assets of a third party. If the third party fails to pay for the work, the workman may enforce a lien and retain the asset until it is paid. Likewise, a worker who works on a home or piece of real estate may place a materialmans lien on the property. Lastly, suing someone may result in a judgment against that individual. The holder of the judgment may attach the judgment to property of the liable defendant. The judgment holder now has a judgment lien on the assets. In all of these situations, the holder of the lien may repossess the property and sell it at auction. The proceeds from sale are used to pay the cost of sale and the debt owed. Any exceed proceeds are returned to the debtor.

Related Topics

• Secured Transactions Law (Intro)
• What is a Security Interest?
• Collateral 
• Pledge as Collateral
• Collateralize
• Cross Collateralization
• After-Acquired Collateral
• Unsecured Loan Definition
  
• Unencumbered Asset
• What is a Secured Creditor?
• Unsecured Creditor
• What are the benefits of security interests for creditors?
• Limited Recourse Debt
• Uniform Commercial Code - Article 9
  
• What are the common types of security interest in real property (land)?
• What is a mortgage?
• How does a security interest protect the mortgage holder?
• Lis Pendens
• Deficiency Judgment
• What is a Deed of Trust or Security Deed?
• What is a Land Sale Contract?
• What is a security interest in personal property?
• How does one establish a security interest in personal property?
• What is Perfection of a security interest?
• What are the methods of perfecting a security interest in personal property?
• UCC-1 Statement
• How does one establish a security interest in real property (land)?
• Register of Deeds
• What is Automatic Perfection of a security interest?
• What is a Purchase Money Security Interest (PMSI) in consumer goods?
• What is a Purchase Money Grace Period for a PMSI in non-consumer goods?
• How does one continue perfection of a PMSI in non-consumer goods?
• What is Temporary Automatic Perfection in Proceeds from the sale of goods?
• How is a security interest created in Assignment of Accounts Receivable and Contract Rights?
• How does one perfect a security interest by Possession of the collateral?
• How does on perfect a security interest by Control of collateral?
• How does one perfect a security interest by Filing a Financing Statement?
• What authorization is required to file a financing statement?
• Where is the appropriate office to file a financing statement?
• Defeasance
• Continuation Statement
• What is Priority of a security interest?
• What role does perfection play in establishing the Priority of a secured party?
• What are the common conflicts arising as to priority of a security interest?
• What is the priority of parties secured by common law and statutory liens?
• Lien - Definition
• Blanket Lien Definition
• Unperfected Lien
• Possessory Lien 
• Non-Possessory Lien 
• Tax Lien
• Mechanics Lien Definition
• Construction Lien
• Cloud on Title
• What is the priority of a buyer of collateral that is subject to a security interest?
• What is required to be a buyer in the ordinary course of business?
• How does 9-320(b) protect consumers who purchase goods from other consumers?
• What is the Shelter Principle?
• What are the general Priority Rules for Conflicting security interests?
• Subordination Agreement
• Who has Priority in Proceeds from the sale of collateral?
• What is a secured party's priority in future advances to a debtor?
• What is the priority of a PMSI in goods (other than inventory and livestock)?
• What is the priority of a PMSI in inventory?
• What is the priority of conflicting PMSIs?
• What is the priority of security interests in fixtures?
• What is the scope of fixture priority rules?