Security interest facts for kids

A security interest is a legal claim on collateral. The collateral can be real estate, personal property or any asset. Collateral is usually used to secure a loan.

The borrower is the party who borrows the funds. The lender is the one who lends the money in return for a security interest. The lender can repossess the asset if the borrower fails to repay the loan. The lender can then sell the asset to repay the loan. A loan secured by collateral is called a secured loan (also called a lien). A loan with no collateral (such as a credit card) is an unsecured loan. There is nothing for the lender to repossess.

Different types

There are different types of security interest or liens:

• Consensual agreements are entered into consensually between a borrower and a lender. For example, a borrower may want to purchase a car or house and the property purchased secures the buyer's obligation to pay for the property.
• Statutory liens are security interests that may be secured by statutes.
  • Mechanic's Liens are those that come about when a mechanic or contractor is not paid for work they performed. The owner may not sell the property (real or personal) until the debt is paid.
  • Tax Liens are a type of lien that is placed against property by the local, state or federal government. They are authorized by statute, for delinquent taxes, including property, income and estate taxes. If the taxes remain unpaid for a specified period of time, the property may be sold by the government in what is called a tax sale.