1. 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.
• Discussion: What role do security interests play in a vibrant economy? What role do security interests play in the assessment of risk in finance?
• Practice Question: Arthur is considering borrowing money from Brand Bank. He is trying to evaluate whether the bank will lend him the money and at what interest rate. What is a primary consideration for the bank in determining whether to loan the money to Arthur?