What is the difference between a “Perfected” security interest and an “Unperfected” security interest?
A. A “security interest” is simply a legal right a lender has to seize property pledged as collateral by the borrower. The purpose of creating a security interest is to help protect the lender against the possibility that the borrower will fail to pay back the borrowed money. If that happens with a secured loan, the lender has a legal right to seize the collateral and use the value of it to pay off the loan. An “unperfected” security interest is one in which the lender has a written document granting a security interest in the borrower’s collateral, but no public notice has been given of the lender’s security interest. The risk with an unperfected security interest is that a third party could come along and buy the collateral from the borrower without realizing that a lender had a security interest. In that event, the lender’s security interest is useless against the third party’s superior claim to the newly-purchased collateral. The only way a lender can protect against a third party
