Legal Definitions - security interest

A security interest is a legal right or claim that a lender (or creditor) has over specific property belonging to a borrower (or debtor). This right is established either through a contractual agreement or by operation of law. Its primary purpose is to ensure that a debt or obligation is repaid. If the borrower fails to fulfill their obligation, the holder of the security interest can take action against that particular property to recover the money owed.

• Example 1: Car Loan

  Imagine David purchases a new car and finances it through a bank. The bank provides the loan, but in return, David signs an agreement granting the bank a security interest in the car itself. This means that while David uses and possesses the car, the bank holds a legal claim over it. If David stops making his monthly car payments, the bank, due to its security interest, has the legal right to repossess the car and sell it to recover the outstanding loan amount.

• Example 2: Business Equipment Financing

  A small printing company, "PrintPerfect," needs to buy a new, expensive printing press. To do so, they take out a loan from a commercial lender. As part of the loan agreement, PrintPerfect grants the lender a security interest in the new printing press. This contractual arrangement ensures that if PrintPerfect defaults on the loan, the lender can claim the printing press and sell it to recoup the money they are owed. The security interest gives the lender a specific asset to target if the company fails to pay.

• Example 3: Mechanic's Lien

  Sarah takes her boat to "Marine Repair Services" for significant engine repairs. After the work is completed, Sarah is unable to pay the large repair bill. In many places, the repair shop can then place a "mechanic's lien" on Sarah's boat. This lien is a type of security interest created by law, not by a specific agreement to pledge the boat as collateral. It gives Marine Repair Services a legal claim over the boat until the repair bill is paid. If Sarah continues to not pay, the shop may eventually have the right to sell the boat to cover the cost of the repairs and storage.