Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Pledged Asset

What it is:

A pledged asset is collateral pledged by a borrower to a lender (usually in return for a loan). The lender has the right to seize the collateral if the borrower defaults on the obligation. In some cases, the lender may require the borrower to place pledged assets such as cash or securities in a separate account that the lender controls.
 

How it works (Example):

Let’s assume you would like to borrow $100,000 to start a business. Even if you have an excellent credit rating, a bank may be reluctant to lend you the money because it may be left with nothing if you default on the loan. Thus, although banks may attempt the lengthy and expensive process of suing you in that circumstance, the bank may require $100,000 of collateral. This collateral might consist of financial instruments, houses, cash, or even objects such as art, jewelry, or other items. When you sign the promissory note, you pledge these assets to the bank as collateral. You might also pledge your business receivables as well. As mentioned above, the lender might require the borrower to put its pledged financial assets into a separate account that the lender controls.   

If you default, the loan agreement gives the lender the right to seize and sell the pledged assets to recover any outstanding balance.

Why it Matters:

Pledged assets give lenders a sense of security, which is why pledged-asset loans often receive better interest rates than unsecured loans.

The type and amount of pledged assets required for a given loan is often a matter of negotiation between the lender and borrower. For instance, a lender might require a borrower to pledge any assets purchased during the loan period.