Under a typical loan agreement, a lender will lend money to a borrower, in return for the borrower repaying the money by a certain date, with interest.
If the borrower doesn’t repay by the due date, the lender can sue them in court. However, suing someone in court is a long and expensive process and doesn’t usually help the lender get their money back – this is because, when a borrower fails to repay their loan, it’s usually because they are in financial difficulty and simply don’t have the money to make their loan repayment.
To protect the lender from the above scenario, the lender will require the borrower to provide “security” for the loan before the loan is made. This involves the borrower granting a security interest, over all or some of its assets, to the lender to secure its obligations under the loan. This means, if the borrower fails to repay the loan, the lender can take those assets and sell them to get their money back.
A common everyday example is a loan to buy a property – the lender will lend the borrower money to buy the property, and the borrower will grant a security interest in that property to the lender (called a mortgage). If the borrower doesn’t repay the loan, the mortgage allows the lender to take the property and sell it to get its money back.