Security agreements

What is an security agreement?

Loans from banks or other institutional lenders are made using a number of documents, two of which are a Promissory and Security Agreement.

In general, the Promissory Note is your written promise to repay the loan back to the lender and a Security Agreement is used when collateral (real or personal property) is given or pledged for the loan and in the event of default, the lender may pursue its legal rights and remedies to gain ownership rights over the collateral. The Promissory Note does not create a secured debt; it merely creates an unsecured debt.

The second instrument that accompanies the Promissory Note, the Deed of Trust, changes the loan from an unsecured loan to a secured loan. In the Deed of Trust, also known as a Mortgage, the borrower pledges the house as collateral. In effect, the borrower promises the bank that if he or she fails to repay the loan, the bank can take the house. The process of taking the house is known as Foreclosure, and it secures the bank’s right to repayment.

Should an attorney review Security Agreements, Promissory Notes, or Deeds of Trusts?

Security Agreements, Promissory Notes and Deeds of Trusts are complex legal documents. Although parties can and do review and sometimes prepare these documents themselves, this could increase the possibility that they will not be prepared correctly and may be legally invalid.

In many instances, invalid legal documents that do not meet the formalities of creation are unenforceable. For this reason, lenders and borrowers should consult with an attorney if they are considering entering into these types of arrangements. An attorney can draft the documents or review them and make sure that they are accurate and legally enforceable in all regards.

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