Why Would a Lender Establish a Security Interest for a Loan?UCC, Revised Article 9
If you’re new to the Uniform Commercial Code (UCC), you’ll need a few basic definitions before we answer that. We’ll start you off with a few terms that are the building blocks of UCC search and filing procedures.
Secured Transaction: This is a loan in which the lender acquires a security interest in collateral that belongs to the debtor.
Security Interest: This is a lender’s claim to collateral that a debtor has provided for a loan. A security interest in granted once a security agreement is reached between the debtor and lender (secured party) via a financing statement. This is commonly done with title loans, as one example.
Financing Statement: This is a form (UCC-1 / Fixture Filing) that a creditor files to post public notice of a security interest for the purpose of perfecting the interest. This also includes any subsequent records relating to the initial filing.
Collateral: This is an asset (or assets) that guarantees the loan will be repaid. If the debtor forfeits the loan, the creditor will claim the collateral to cover the debt.
The main reason that a lender would establish a security interest for his loan is to achieve priority over additional creditors. A secured transaction generally has priority over an unsecured transaction, and priority between multiple secured lenders is determined by who filed his financing statement first.
If this topic interests you, check out our free, on-demand webinar The Basics of Lien Priority, presented by Attorney Bradley B. Clark.
As always, consult your legal counsel if you are unsure of any definitions or procedures.