A secured transaction is a method of financing a purchase. Secured transactions are an important part of the economy of every country. Many commercial entities get financing for their activities by giving some of their assets as security for their loan.
A secured transaction is a transaction that is founded on a security agreement. A security agreement is a provision in a business transaction in which the obligor, or debtor, in the agreement gives to the creditor the right to own property owned or held by the debtor. This property, called collateral, is then held by either the debtor or the secured party to ensure against loss in the event the debtor cannot fulfill the obligations under the transaction.
The law on secured transactions differs widely from country to country. On the subject of secured transactions there has been an initiative of UNCITRAL, the United Nations Commission on International Trade Law to consolidate this area of law. A working group of this commission has developed a legislative guide on secured credits. The guide is primarily intended for use by developing countries which do not yet have a law on secured credits but it is possible that other countries may also use the guide to reform their own laws. The purpose of UNCITRAL was to design a model law which consists of guidelines on a law for secured transactions.
The main objective of the legislation recommended in the draft Guide is to facilitate secured financing. On the assumption that security reduces the risk of non-payment, secured financing is considered as having the potential of enhancing the amount of credit that can be made available and of decreasing its cost. At the same time, the draft Guide recognizes that such an economic result cannot be reached automatically only through the enactment of appropriate legislation but depends largely on the relevant infrastructure, judiciary and enforcement mechanisms existing in a legal system.