A Secured Credit transaction is a transaction in which a lender (otherwise called creditor) acquires a security interest in collateral owned by the borrower (otherwise called debtor) and is entitled to foreclose on or repossess the collateral in the event of the borrower’s default in repayment or any other clause in the security agreement. The terms of the relationship are governed by a contract, or security agreement.
NEED FOR SECURITY
Commerce and Investment are the lifeblood of any economy. Financing these major economic activities require the use of credit facilities by individual entrepreneurs, corporate entities, small and large scale industries and multi-nationals, many of whom source capital largely from borrowing. Banks and other Financial Institutions provide the tonic for the vigorous commercial activities through lending. The provision of credit facilities is an investment for banking and a method of financial undertaking which propels economic growth.
Basically, a lender has two options in providing credit facility. Reliance may be placed on the borrower’s covenant to repay, having been satisfied of the viable purpose for which the credit facility is required, and the certainty of the source of repayment. It has been said that the most important factor to be taken into consideration when assessing the safety of an advance is the borrower’s capacity to repay the loan in accordance with his promise. But going by this proposition, the debtor can default and the creditor may discover that his interest is postponed to that of a secured creditor where the debtor’s assets have been given to secure another loan. In the event of the debtor’s bankruptcy, or insolvency, repayment of the loan depends on availability or sufficiency of debtor’s assets, and the creditor may soon discover that he has no remedy.
The second option is for the lender to take, in addition to the debtor’s covenant to repay, tangible assets and/or personal assurance in the form of guarantee or indemnity as security for the loan. This option is usually adopted by most, if not all banks, and has been preferred from the earlier times due to the disappointments and losses identified with unsecured credit. If the lender were sure that the borrower would honour his indebtedness when due, there would have been no need for security since there is always a promise to repay in all credit transactions. Experience has taught most lenders that the borrower who promised in earnest to repay on the due date may turn out to be very hostile and uncompromising when called upon to fulfil his financial obligations to the lender. As a result, the lender in most cases will refuse to accept the empty promise of the borrower, but would rather insist that certain property or additional third party assurance be made available to secure the debt, so that when the borrower reneges, the lender can have something to fall back on.
Security is indeed an assurance provided by the debtor in addition to the personal promise to discharge an obligation owed the creditor. Read More…