Overview of Secured Transactions

Secured transactions are the ones that are based on a secured contract. In such transactions, the obligator, otherwise known as the debtor, grants the creditor the permission to have complete rights on the property that serves as a security. This property is termed as collateral. It is used by the creditor against losses, in case the debtor fails to make the repayment according to the terms and conditions of the contract. For example if a car is purchased with financial assistance, then it can be considered a secured transaction. The dealership or another lender finances for the car while it's purchased. A contract is drawn allowing the buyer to make the payment in monthly installments along with the interest amount. If the buyer misses payments and is unable to repay the amount, the property (car) is then seized by the lender.  

General Types of Secured Transactions

There are numerous forms of secured transactions but the three most common consumer transactions are chattel mortgages, conditional sales and pledges.

  • In chattel, mortgage collateral is used as a security against the loan obtained. The debtor is allowed to own the collateral as long his payments are regular. In case of default, the creditor gains the right to ownership of the property.
  • In pledge, the debtor has to hand over the property pledged to the creditor to obtain the loan. After the complete repayment is made, the debtor regains his rights to his property that has been pledged. In case of failure to repay the loan amount, the creditor retains the pledged security with him and uses it to recoup losses.
  • The third form of secured transaction is condition sales, where the debtor is allowed to buy an item using the financial assistance of the creditor. A contract is drawn up in such a way that if the payment is not made on time, the purchased property belongs to the creditor.

General Types of Collateral

According to article 9 of Uniform Commercial Code, any property that a creditor accepts as collateral can serve the purpose of a security. However, collaterals usually fall into one of the five categories: farm products, inventory, equipment, consumer goods and property on paper. In 2001, revisions to the article 9 of UCC were made allowing personal properties to be accepted as collaterals in many states of USA. Stocks and bonds come under the category of property on paper. According to the revised sections of article 9, commercial deposit accounts and promissory notes also serve as collateral.

Formalities Involved

A secured transaction is considered valid if a written agreement stating all terms and conditions is signed by both the parties. Details regarding the amount lent, nature of property used as collateral, repayment and default terms should be clearly mentioned.

After this formality, the secured party has to register this agreement with public records or other governing authorities. This is to legally grant rights to the creditor on the collateral. In most states, the period of such transaction is 5 years. However, this can be extended by renewing the agreement before the period is expired. Once the loan is repaid in full, the creditor sends a transaction notice to the debtor releasing the collateral. This is intimated to the office where the financial statement of the transaction is registered.

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