As a lender, you want as much assurance as possible that borrowers will pay back their loans. One way to do this is to have the borrower sign a security agreement.
This contract outlines the details of a secured transaction and protects the lender.
Purpose of secured transactions
According to Ohio.gov, a secured transaction is a loan transaction that guarantees that the borrower will turn over the property that the loan is for in the event he or she defaults on the loan. When this occurs, the lender sells the property and uses the proceeds to pay off the loan. Article 9 of the federal Uniform Commercial Code, as well as the Ohio Revised Code Chapter 1309, govern all security agreements.
The security interest is especially beneficial for the lender in the event the debtor declares bankruptcy. In bankruptcy cases, secured lenders are able to collect their debts before unsecured ones are.
Types of items covered by secured transactions
According to the Cornell Law Legal Information Institute, security agreements are for personal property that is commercial and consensual. This includes personal property that attaches to real property, which is also described by the term “fixtures.” The UCC does not govern real property secured transactions or statutory liens.
Requirements for an enforceable security interest
In order for a court to enforce a security agreement, it must include three things:
- The debtor must provide value in exchange for the property
- The borrower must have rights in the property
- The property must be in the possession of the lender, or the debtor must give a description of the property to authenticate the agreement
A secured agreement should also include information about what constitutes a loan default, the rights the debtor has in the event of a default and other obligations of each party.