Law Quadrangle (formerly Law Quad Notes)

Article Title

Why Secured Credit?


This essay is based on "Explaining the Pattern of Secured Credit," 111 Harvard Law Review 625 (1997) and "Strategy and Force in the Liquidation of Secured Debt," 96 Michigan Law Review 159 (1997).

Secured credit is a dominant feature of the U.S. economy: institutional lenders (including federally insured depository institutions, insurance companies and nonbank finance companies) in this country currently hold more than $2 trillion dollars of secured debt. Although the practice of secured lending is widespread, we know astonishingly little about what motivates commercial borrowers and lenders to use secured credit. Conventional wisdom offers an answer that seems obvious. Lenders take collateral because it provides a method of ensuring repayment ii the borrower defaults. The converse, of course, is that borrowers grant collateral because it lowers the interest rates that they must pay to their lenders as compensation for the money that they borrow. Thus, the commonplace answer focuses on force: a grant of collateral to a lender enhances the lender's ability to collect its debt by enhancing the lender's ability to take possession of the collateral by force and sell it to satisfy the debt.