What is a secured transaction?

A secured transaction is characterized by the involvement of a creditor and collateral, establishing a legal claim on an asset when a loan is issued. This means that in the event of default by the borrower, the creditor has the right to repossess or take the collateral to recover the loan amount. The collateral serves as a form of protection for the lender, reducing the risk associated with extending credit.

In contrast, other scenarios such as loans based solely on personal signatures or unsecured loans lack this layer of protection, as they rely on the borrower's promise to repay without any specific assets that can be reclaimed in case of default. Cash transactions without collateral do not involve any obligations that can be enforced through securing assets, which is fundamentally what distinguishes secured transactions from other types of financial agreements.