Legal Definitions - Secured transaction

Secured transaction

A secured transaction is a type of deal where a buyer or borrower (called a debtor) promises to pay back a debt by giving the seller or lender (called a secured party) a security interest in property. This property is called collateral. If the buyer or borrower fails to pay back the debt, the seller or lender can take possession of the collateral or anything else specified in the security agreement.

Example 1: John wants to buy a car but doesn't have enough money to pay for it upfront. He goes to a bank and takes out a loan to buy the car. The bank becomes the secured party and John becomes the debtor. The car becomes the collateral. If John fails to pay back the loan, the bank can take possession of the car.

Example 2: Sarah wants to start a business and needs to buy equipment. She goes to a supplier and agrees to pay for the equipment in installments. The supplier becomes the secured party and Sarah becomes the debtor. The equipment becomes the collateral. If Sarah fails to pay for the equipment, the supplier can take possession of it.

These examples illustrate how a secured transaction works. In both cases, the debtor promises to pay back a debt by giving the secured party a security interest in property. If the debtor fails to pay back the debt, the secured party can take possession of the collateral.