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What you need to know about security interest...

What issecurity interest?

Security interest is the legal claim a lender places on the collateral against which a loan is raised, to ensure that a borrower continues making repayments on the loan.

Where have you heard about security interest?

You will most likely have encountered it when arranging a home loan (mortgage) or a car loan, as it is the agreement placed on the loan you are attempting to secure.

Secured debt, such as car loans, business loans and mortgages usually have a security interest, so that the lender can repossess the item that the debt has been secured against, if the borrower fails to maintain repayments. The lender can then sell the repossessed item to settle the balance of the loan.

When a security interest is granted on a loan it is called a security transaction [link], and there are three requirements to ensure that the security interest is valid legally:

  • The security interest has a defined value
  • The borrower owns the item or collateral
  • The borrower has signed the agreement in which the collateral is clearly stated (such as the full location of the property or the full name of the car)

The exception is credit card companies cannot repossess any items purchased on the card and not paid off yet, as this debt is unsecured.

If a business took out a loan and invested it in new machinery, but then went bankrupt, the loan agreement would state that the security interest related to the machinery, which the bank would be able to reclaim to pay off the outstanding amount against the loan. As a secured lender, the bank would be higher in the order over the unsecured lenders in regard to making a claim on the assets of the bankrupt business.


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