Non-Purchase Money Security Agreement

The difference between a non-purchase money security agreement and a purchase money security agreement is an obvious one. The purchase agreement is made on a piece of property a person agrees to purchase. A non-purchase money security agreement converts a piece of property a person already owns into collateral.

Many kinds of secured loans are based on non-purchase money security agreements. The oldest and most basic kind of loan based on a non-purchase money security agreement is a pawn loan. In a pawn loan, a person turns a piece of property over the pawnbroker. The pawnbroker holds the item as collateral or security for the loan.

The agreement a person signs when they take out a pawn loan is a type of non-purchase money security agreement. There are many other kinds of secured loans based upon non-purchase money security agreements.

Secured Loans Based on Non-Purchase Money Security Agreements

Many real estate and real estate equity loans, including hard money loans and loans taken out to pay for home repairs, are based on such agreements. The agreement gives the lender the right to place a lien against the real estate if the loan is not paid off.

Such agreements allow a property owner to convert equity in real estate into credit. Popular examples of these include home loans and home equity lines of credit. These are really secured loans in which an interest in a home is being used as collateral.

In the hard money loans taken out by real estate investors, the investor puts up an interest in the real estate as collateral. This can be used to purchase the real estate or to repair or improve the property to make it easier to rent to tenants.

Hard money agreements are non-purchase money security agreements because the lender does not want to take possession of the property. Instead, he or she gets the right to file a lien against it if secured loans are not paid.

Non-Purchase Money Security Agreements for Business Finance

These agreements are widely used in the world of business finance. Most of the venture capital and angel investor loans to startup businesses and entrepreneurs are based on some sort of non-purchase money security agreement.

These are really secured loans in which a right to place to place a lien on the business is used as collateral. The terms for venture capital arrangements can be quite liberal because they are designed to encourage the development of new businesses and industries.

Hard money and cash loans to businesses operate in much the same way except they involve much higher interest rates. In many cases, these loans are designed for businesses that have poor credit ratings.

Secured Loans for Business

Examples of secured loans for business based upon non-purchase money security agreements include inventory and accounts receivable loans. In these loans, a firm's unsold inventory or uncollected invoices are put up as collateral. If the inventory is not sold within a certain period, the lender has the right to seize it. If the invoices are not collected, the borrower signs them over to the lender. The lender then gets the right to collect the invoices.

Since no purchase is involved in secured loans based upon these agreements, the interest rates charged can be much higher. Many of these loans are designed for individuals or businesses that cannot get other kinds of loans or credit.

Lenders can make these loans because they take less risk when making them. The collateral is designed to lessen the risk of loss for the lender.

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