What is a security interest?

A security interest is defined as a legal claim or right that a lender has over a borrower's personal property or fixtures to secure the payment of a debt or obligation. This means that if the borrower fails to fulfill their obligations, such as repaying a loan, the lender has the right to take possession of the specified personal property to satisfy the debt. This concept is integral in secured transactions as it provides lenders with assurance and a form of collateral, reducing their risk.

Personal property can include various types of assets, such as inventory, equipment, or accounts receivable, while fixtures are items that are affixed to real estate but can be separated from it, such as machinery installed in a building. By securing an interest in these properties, the lender ensures that they have a fallback option should the borrower default.

The other options do not accurately capture the essence of a security interest. For instance, an interest in real estate related to residential properties pertains to real property rather than personal property. A passive interest without any financial obligation lacks the active role and security component inherent to a security interest. An investment in mutual funds is unrelated to the concept of securing an obligation with personal property. Each of these alternatives does not fit the definition or function of security interest in the