Legal Definitions - security agreement

A security agreement is a legal contract where one party (the debtor) grants another party (the secured party, often a lender) a legal claim over specific property. This claim, known as a "security interest," acts as a guarantee that the debtor will fulfill an obligation, typically repaying a loan.

If the debtor fails to meet their obligation, the secured party can take possession of or sell the specified property to recover what they are owed. For the agreement to be legally effective, it must clearly identify the property being used as collateral and be signed by the debtor.

• Example 1: Business Equipment Loan

  A small manufacturing company needs a loan to purchase new machinery. The bank agrees to provide the loan but requires a security agreement. In this agreement, the company (the debtor) grants the bank (the secured party) a security interest in the new machinery itself. If the company defaults on its loan payments, the bank has the right to repossess and sell the machinery to recover the outstanding debt.

  How this illustrates the term: The security agreement creates a legal claim (security interest) for the bank over specific property (the new machinery) to ensure the company performs its obligation (repaying the loan).

• Example 2: Personal Loan Secured by Artwork

  An individual needs a personal loan but has limited credit history. To secure the loan, they offer a valuable painting from their private collection as collateral. They sign a security agreement with the lender, granting the lender a security interest in the painting. This means that if the individual fails to repay the loan as agreed, the lender can take possession of the painting and sell it to cover the unpaid amount.

  How this illustrates the term: Here, the security agreement establishes the lender's claim (security interest) on the specific personal property (the painting) as a guarantee for the individual's obligation (repaying the personal loan).

• Example 3: Vehicle Financing

  When someone buys a new car using a car loan, they typically enter into a security agreement with the financing company or bank. The agreement states that the car itself serves as collateral for the loan. The buyer (debtor) grants the lender (secured party) a security interest in the vehicle. Until the loan is fully paid off, the lender holds a legal claim on the car. If the buyer stops making payments, the lender has the right to repossess the vehicle.

  How this illustrates the term: This common scenario demonstrates a security agreement where the purchased item (the car) is the collateral, and the lender's claim (security interest) guarantees the buyer's obligation to repay the car loan.