What is a security interest?

A security interest is property (collateral) that secures (guarantees) the payment or performance on a note.

Security and the Promissory Note

The security for the promissory note is your house. If you default on your payments the lender’s security interest in your house gives it the right to foreclose.

A simple loan, such as to a friend, is usually not made with security. If your friend doesn’t pay you back, you either forget about it or file a lawsuit to recover your money.

An Example

An example of a small secured transaction takes place at the pawnshop. When you give the pawnshop owner a diamond ring in exchange for $300, he holds the ring as security for its return. If you don’t pay back the money, he sells the ring.