A security interest is an interest in property—real estate or otherwise—that secures repayment of a debt or performance of some other obligation. If the party that grants the security interest fails to fulfill its obligation, then the holder of the security interest can normally take possession of the asset in question and sell it in order to recoup any losses. Security interest dramatically reduces the level of risk a lender takes on, thereby allowing for lower interest rates and other incentives to borrow. If a security interest is granted, the exchange is known as a 'secured transaction.'
Under a security agreement, the debtor's personal property (non-real estate) and intangibles, such as intellectual property, are often used as collateral.
Other examples of collateral include inventory, equipment, machinery, farm products and crops, appliances, furnishings, fixtures, accounts receivable, deposit accounts, contract rights, and general intangibles. If the debtor defaults on repayment, the creditor (also called the secured party) will be able to keep or sell the collateral.
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