Grant of security interest: Overview, definition and example
What is a grant of security interest?
A grant of security interest refers to the act of a borrower or debtor offering collateral to a lender or creditor in exchange for a loan or credit. The security interest provides the lender with a legal right to seize the collateral if the borrower defaults on the loan or obligation. The grant of security interest is typically formalized through a security agreement, where the terms of the collateral, its value, and the conditions under which the lender can take possession are clearly outlined.
This is a common practice in both business and personal lending, particularly in secured loans, where assets such as real estate, equipment, or accounts receivable are pledged to secure the repayment of debt.
Why is a grant of security interest important?
A grant of security interest is important because it provides the lender with a measure of protection in case the borrower fails to meet their obligations. It reduces the lender’s risk by ensuring that there is an asset that can be seized and liquidated to recover the loan amount. For the borrower, offering collateral can often lead to more favorable loan terms, such as lower interest rates, since the lender’s risk is mitigated.
In contracts, the grant of security interest outlines the rights and responsibilities of both parties concerning the collateral, providing clarity and legal certainty.
Understanding grant of security interest through an example
A business takes out a loan from a bank to purchase equipment. As part of the loan agreement, the business grants a security interest in the equipment, meaning that the bank has the legal right to seize and sell the equipment if the business defaults on the loan. The business continues to use the equipment while making loan payments, but if the business fails to meet its obligations, the bank can take possession of the equipment to recover the amount owed.
An example of a grant of security interest clause
Here’s how a grant of security interest clause might appear in a contract:
“As collateral for the loan, the Borrower hereby grants the Lender a security interest in the equipment described in Exhibit A. The Borrower agrees that in the event of a default, the Lender has the right to take possession of the collateral and sell it to satisfy the outstanding debt. The Borrower warrants that the collateral is free from any prior liens or claims, except as disclosed in this Agreement.”
Conclusion
The grant of security interest is a key provision in secured transactions, providing lenders with a legal right to claim and liquidate collateral in case of borrower default. By defining the collateral and conditions for its use and seizure, both parties understand their rights and obligations. A clear grant of security interest clause ensures that the terms are enforceable and provides the lender with a layer of security, while offering the borrower access to financing under more favorable terms.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.