What is the function of a Security Agreement?

• A. It specifies what the loan can be used for
• B. It creates a lien on collateral to secure the loan
• C. It lists the borrower's personal information
• D. It determines the distribution plan

Answer: (B)

The function is to create a lien on collateral to secure the loan. A security agreement outlines exactly what property serves as collateral and binds the borrower to give the lender a security interest in that property. Once attached, the lender has a right to repossess or liquidate the collateral if the borrower defaults, making the debt legally collectible from the encumbered assets. This instrument is typically part of secured lending and is often paired with a financing statement to perfect the lien against third parties.

It doesn’t control how the loan proceeds are used, which would be covered by other loan terms; it doesn’t list the borrower’s personal information as its purpose; and it doesn’t set a distribution plan, which relates to bankruptcy or equity arrangements rather than securing the loan.