Lenders of loans to a borrower always seek enforcement of security interest on the piece of collateral issued by the borrower in order to increase the level of security for the collateral and reduce the risk of default in case of lack of payment. Meiners, Ringleb and Edwards (2011) affirms that through the security interest in the collateral the lender has priority over the rest of the creditors in case of a default as the lender is above the unsecured creditors. In addition, the lender benefits as they can reclaim the property that serves as collateral upon default without undergoing a judicial process as long as there is no breach of peace.
The perfection of the security interest involves the establishment of priority through the superiority rights over the rest of the creditors (Meiners, Ringleb & Edwards, 2011). In this case, the creditor gives notice based on the existence of a security interest on collateral such that the rest of the creditors will be aware that they stand behind in the perfected interest of getting paid (Wood, 2007). Order of perfection interest is determined by the dates when the interest in the collateral is placed by the creditors therefore, the order of the date gains superiority.
Once the securities have been perfected it is a clear indication to the creditor that the special interest in the collateral acts as a guarantee of payment since they have priority over the rest of the creditors in case of default in repayment (Meiners, Ringleb & Edwards, 2011). This is because as security agreement is signed by the lender and borrower based on the terms of repayment, including the interest rate.
The issuer of the loan may take over the collateral upon the borrower’s default in paying the debt according to the agreed terms upon the issue of the loan (Wood, 2007). As long as there is proof that the debtor cannot repay the loan, the lender can resell the collateral in order to get back the outstanding amount on debt. In case, the creditor has been commissioned by the state law to take over the property or when breach of repayment terms becomes consistent with time.
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