What is a Secured Transaction?
A loan or a credit transaction generally involves a contract between the lender and the debtor/borrower. The contract specifies the amount being borrowed or the credit available in the case of a revolving credit line. The loan agreement also specifies things like the interest rate and the consequences of late payments or non-payments.
There are different types of loans and credit transactions including both secured and an unsecured transactions. A secured transaction differs from an unsecured transaction because the borrower pledges some type of collateral. This provides more protection for the lender.
What is a Secured Transaction?
A secured transaction refers to any type of contract or loan agreement in which the lender acquires a security interest in the borrower’s property. This essentially means that the lender has an ownership stake in the property and could sell it, if necessary, in order to generate money to repay the debt.
In many cases, a secured transaction involves the lender acquiring a security interest in the property that the debtor is borrowing money to buy. For example, when a debtor takes on a car loan, the car acts as the collateral and the lender has a legal interest in the car. The lender keeps the title and has an ownership stake in the vehicle until the car loan is paid in full.
A home mortgage is another example of a situation where the lender has a security interest in the property the debtor is buying. The homeowner is obligated to repay the lender and until the mortgage is paid in full, the home acts as collateral.
In other situations, a debtor will pledge some type of collateral in exchange for a loan to use for other purposes. For example, a debtor who goes to a pawn shop could take a loan out to buy groceries but could use his car title as collateral. In these types of loans, the lender acquires an interest in the property that the debtor pledges and retains that interest until the loan is paid.
When a debtor and a lender enter into a secured transaction, the lender has more protection from default than in an unsecured transaction. In an unsecured transaction, a lender can have a difficult time collecting money if the debtor does not pay. For example, if someone decides not to pay their credit card bill, the lender could go to court and get a judgment and the debtor would be ordered to pay. However, if the debtor did not pay (or could not pay), then the lender would have to pursue further legal actions like trying to get wages garnished. There would be no specific assets the lender could take and sell if the debtor didn’t earn enough for the debt to be satisfied.
In the case of a secured transaction, the lender could take possession of the collateral through processes like foreclosure and repossession and then sell the asset to repay the outstanding balance. If any money was left over after the sale, only then would the debtor get some of the proceeds.
An experienced Las Vegas, NV business law attorney can help you to understand your rights and responsibilities in secured transactions. Call today to schedule a consultation and learn more.