… you have granted a loan and the borrower transfers the ownership of certain assets to you as security for repayment
… the borrower needs to use the assets used as collateral and keep them in its possession
… you have taken out a loan and must provide the lender with the ownership of certain assets to secure its repayment
Under this security transfer agreement, a borrower transfers the ownership of certain assets to a lender to secure a loan, while retaining the possession of the assets.
Unlike a traditional pledge, there is no transfer of possession of the assets. Hence the borrower can continue to use them, which is why this form of guarantee is widely used in practice.
However, because there is a risk of jeopardizing other creditors’ rights, there must be a good reason to do so. This may be the case, for example, if the machines or production tools are used as collateral. The assets used as a collateral remain the lender’s ownership until full repayment.
If the borrower is in default for payments under the loan (for instance, it has failed to pay the interest when due), the lender may force the borrower to hand over the assets and realize them, mostly through a private sale. The sales proceeds are then set-off against the amounts due by the borrower. This allows the lender to recover (at least part of) its losses and serves to mitigate the credit risk of the borrower.
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