The demand for security on loans varies from country to country

The demand for security on loans varies from country to country

Lenders, therefore, urge borrowers to give security for the loan unless the credit standing of a specific debtor is free from any doubt. A security interest on goods (called collateral) entitles the creditor to satisfy his outstanding claim from the charged good to the exclusion of the other creditors of the borrower. Hence a security interest gives the secured creditor a right of preferential satisfaction from the goods charged with the security interest.

They endow the loans of certain lenders (usually publicly held or controlled banks) with a security interest or a right of preferential satisfaction

In general, the demand is greater the more developed the credit system is. But even among countries having a comparable credit structure there are variations. Thus, certain countries, especially France, put legal obstacles in the way of modern forms of security, whereas others have recourse to various forms of personal security.

In the event of a borrower’s bankruptcy, the lender may have to share the borrower’s assets with competing creditors and may receive only partial satisfaction or even none at all

The oldest security device that is common everywhere is the pledge (or pawn). The borrower delivers the goods to be charged to the lender, who keeps them until repayment of the secured loan. This security device has become rather outmoded today and is utilized only in relatively few situations. But pawnbrokers continue to operate on a minor scale, and banks keep documents of title (such as property deeds) as security.

The decisive drawback of the pledge is the necessity of transferring the goods to be charged to the lender. Hence the borrower cannot use them for production, sale, or lease. There has thus been a trend away from the pledge to other forms of security by which the goods charged remain in https://www.paydayloansohio.net/cities/blanchester/ the hands of the borrower. Many new devices have been introduced since the latter half of the 19th century, and they vary considerably in their operation. For want of a common descriptive name, they will be referred to as “no-pledge devices.” They all attempt to overcome the problem posed by the fact that third persons, relying on the outer appearance of a well-funded borrower, have no means of knowing whether or not the borrower’s assets are in reality already charged in favour of another lender.

The most common method of warning third persons against existing security interests has been by their registration. Goods so charged are entered in a public register together with details about the goods themselves and the security agreement. A simpler method of giving publicity to a security interest is by marking the charged goods. This is still sometimes used in the case of cattle. Some countries also employ the method of “privileging” specific lenders. All the borrower’s goods, or at least those that have been acquired by means of the loan, are automatically charged.

In the absence of any of the above three methods, various indirect techniques are usually employed. The need for sellers to retain a security interest in the goods sold until the purchase price has been paid has been particularly acute. In some, especially Latin, countries, the rules on sales provide the seller with a statutory right of preferred satisfaction. But in most jurisdictions, the seller must make his own arrangements. Since the transfer of ownership in the goods is subject to the agreement of the parties, the seller may retain his ownership in them until he has received the full purchase price. Such a “conditional sale” is recognized in many countries even without registration, since it is regarded as a modified sales transaction. If the seller himself is using credit to finance his credit sales, the financer can usually be secured by transferring to him the seller’s retained ownership. In some countries, including Great Britain, the so-called hire-purchase method is widespread, especially in sales to consumers. The seller retains ownership but surrenders the goods that the buyer intends to acquire on hire to him against a down payment and a monthly rental. If in due course the rental payments accumulate to the sale price, ownership is transferred to the purchaser. Here again registration is usually not required since the transaction is cast into the form of a lease.