Posted in Finance, Accounting and Economics Terms, Total Reads: 318
Definition: Pledged Asset
Pledged Asset can be defined as an asset that is transferred to the lender as collateral security for the loan amount borrowed by the borrower. This is generally done when the lender maybe a bank is worried about the credit rating of the borrower and fears he might default on the loan amount borrowed.
There are four methods of securing a loan with collateral. It might be a pledge, hypothecation, mortgage or lien. The difference between these methods is regarding the use of asset. In case of pledge the right to use lies with the lender. For example jewellery loans are a form of pledged loans. In case of an hypothecation, the right to use lies with the borrower but owner can seize the asset and sell it in case of default. For example, car loans are a form of hypothecation. Similar is the case of mortgage which is different from hypothecation in only that the asset used as collateral is immovable property. In case of a lien, financial instruments such as fixed deposit are used as collateral. Pledged assets generally give lenders a sense of security hence they are inclined to offer competitive interest rates to the borrowers. An unsecured loan generally means higher interest rates.
A pledged asset comes back to the borrower when all conditions of the obligation have been fulfilled. Home purchasers can at times vow resources, for example, securities, to loaning organizations keeping in mind the end goal is to lessen the essential up front instalment. In this way, these securities would not need to be sold with a specific end goal to meet the upfront installment prerequisites, taking into account any capital appreciation while keeping up the associate mortgage benefits.