What is a secured transaction?

A secured transaction is fundamentally characterized by the presence of collateral that backs the loan. In this context, collateral refers to an asset that a borrower offers to a lender to secure the repayment of a loan. If the borrower defaults on the loan, the lender has the legal right to take possession of the collateral to satisfy the debt. This arrangement provides a level of security for the lender, as it diminishes the risk associated with lending, knowing they have a claim to specific assets in case of default.

The essential feature of secured transactions is the use of collateral; this distinguishes them from unsecured transactions where no such collateral exists. In addition, secured transactions can encompass various types of personal property, not limited to real estate. While real estate can be a form of collateral in certain contexts, secured transactions are not exclusive to it, as they can include movable property, inventory, equipment, and other tangible or intangible assets.

Given this, the definition that describes a secured transaction accurately is one that includes a financial arrangement with collateral backing the loan.