What Is a Pledged Asset?

A pledged asset is a valuable item owned by a borrower that serves as collateral for a loan. Secured assets can include real estate, equipment, investment accounts, and more. Lenders receive an equity share of the pledged assets as collateral, which can be seized if the loan is not repaid in full.

Next, we will delve into what can be used as a pledged asset, why collateral may be necessary, and what are the alternatives for pledging assets for a loan.

Definition and examples of pledged assets

Sometimes lenders require collateral to issue a loan. This guarantee helps ensure that the lender is repaid. If the borrower does not repay the loan as promised, the lender can keep the collateral.

If a borrower is taking out a loan to buy a particular asset, such as a house or car, that item will serve as collateral for the loan. However, the lender may also require additional collateral. This can happen if the borrower has very little equity in the asset he is acquiring. For example, a borrower making a low down payment on a home or car may not have much equity, so the lender may require additional collateral in addition to the home or vehicle.

Pledged assets can serve as additional collateral for a loan. These assets are other items of value, such as an investment account for individuals or accounts receivable from companies. For example, Wells Fargo Advisors and Charles Schwab Bank offer bond-based loans.

The borrower retains ownership of the pledged assets, but gives the lender a legal interest in them as long as there is an outstanding balance on the loan. If the borrower defaults on the loan, the lender can keep the pledged assets as collateral.

How pledged assets work

Lenders may require pledged assets to ensure that there are sufficient collateral to repay a loan if the borrower fails to meet its repayment obligations. Lenders may also demand pledged assets to ensure that the borrower has a financial stake in the financed purchase. In other words, lenders want the borrower to have some of their own money or assets at risk, and the lender will risk money when making the loan.

Many types of valuable assets can be pledged as collateral, including bonds such as stocks and bonds. If assets of uncertain value are pledged as collateral, the lender may require a valuation of those assets to ensure that their values ​​are high enough to guarantee the loan.

Below is an example of how pledged assets work. Let's say an entrepreneur wants to borrow $ 2 million for a startup. The lender may require you to pledge your investment account as collateral for the large loan. All assets in the investment account, such as stocks and bonds, would be pledged and the creditor would be entitled to them if the entrepreneur defaults.

The entrepreneur, in this case, would remain the owner of the stocks and bonds and could manage the account. But if they default on the loan, the lender could keep those assets.

Alternatives to pledged assets

Unsecured loans are an alternative to the need for collateral. There is no need for collateral with unsecured loans. The lender makes the loan based entirely on his promise to repay the loan. Since there is nothing to guarantee the loan, it can be more difficult for the lender to collect the money in the event of default.

An unsecured loan may pose less of a risk to the borrower, as the borrower is not risking assets. However, unsecured loans are riskier for lenders because there is nothing to guarantee payment beyond the borrower's signature on the loan agreement. Sometimes it can be more difficult to get approved for an unsecured loan rather than one backed by pledged assets, and unsecured loans often have higher interest rates and require borrowers to have good or better credit.

If you have bad credit and need a loan, you can pledge assets to secure one. If you don't have anything you can use as collateral for a secured loan, you may need the help of a co-signer to obtain an unsecured loan. Consider all of your secured and unsecured loan options before applying.

Enjoy Watching This Video About Loans

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Source: Rob Spinosa

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