Security interest facts for kids

A security interest is a special agreement. It gives a person or company (the lender) a legal right to something valuable (called collateral). This collateral belongs to someone else (the borrower). The lender gets this right to make sure a loan is paid back.

Think of collateral as a promise. If you borrow money, you might offer something you own as collateral. This could be a house, a car, or other valuable assets. If you can't pay back the loan, the lender can take your collateral. They can then sell it to get their money back.

How Does a Security Interest Work?

When someone needs money, they often ask a bank or another person for a loan. The person who borrows the money is called the borrower. The person or bank who lends the money is called the lender.

To make sure the lender gets their money back, they might ask for a security interest. This means the borrower agrees to let the lender have a claim on something valuable. This valuable item is the collateral.

If the borrower does not pay back the loan as agreed, the lender has the right to take the collateral. This is called repossessing the asset. After taking the asset, the lender can sell it. The money from the sale helps the lender get back what they are owed.

Secured vs. Unsecured Loans

Loans that have collateral are called secured loans. A secured loan gives the lender more safety. If the borrower doesn't pay, the lender has something to take. A security interest is also sometimes called a lien.

Some loans do not have collateral. These are called unsecured loans. A good example is a credit card. If you don't pay your credit card bill, the credit card company cannot take your car or house. They have no security interest in your property.

Types of Security Interests

There are different ways a security interest can be created. They usually fall into two main groups: agreements you make, and claims set by law.

Consensual Agreements

Consensual agreements are security interests that both the borrower and the lender agree to. This is the most common type.

• Buying a Car or House: When you buy a car or a house with a loan, the car or house itself often becomes the collateral. The lender (like a bank) has a security interest in it. This means if you stop making payments, the bank can take back the car or house. You agree to this when you sign the loan papers.

Statutory Liens

Statutory liens are security interests that are created by laws (statutes). You don't always agree to these directly. They happen because of certain situations.

Mechanic's Liens

A Mechanic's Lien can happen if someone does work on your property but doesn't get paid. For example, if a builder fixes your house or a mechanic repairs your car, and you don't pay them, they might be able to put a lien on your property. This means you might not be able to sell that property until you pay them what you owe.

Tax Liens

A Tax Lien is a claim placed on your property by the government. This happens if you don't pay your taxes, like property taxes or income taxes. The government can put a lien on your house or other assets. If the taxes are not paid for a long time, the government might even be able to sell your property to collect the unpaid taxes. This is called a tax sale.