Pledge as Collateral – Definition

Cite this article as:"Pledge as Collateral – Definition," in The Business Professor, updated April 7, 2019, last accessed October 21, 2020, https://thebusinessprofessor.com/lesson/pledge-as-collateral-definition/.

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Pledge Assets as Collateral – Definition

To plege assets as collateral (or “Pledging”) is the act of offering assets as collateral to secure loans. Assets pledged can be in the form of security holdings that have a considerable value, and act as assurance for recovering the borrowed amount should a homeowner fail to pay up. The more valuable the pledging, the lesser the amount of down payment required. Borrowers need not sell these assets to pledge them, they are only held as collateral in case of failure to pay, allowing the securities held to grow in value.

A Little More on What is Pledging Assets

Borrowers and Lenders – Pledgers and Pledgees, negotiate an agreement to pledge certain assets as collateral. It provides pledgees a sort of guarantee that their money can be recovered, while allowing pledgers to get better interest rates on loans or mortgages.

Different Types of Pledging

 

  • Pledged-Asset Mortgage

 

Ideal for people in higher income brackets, it is recommended when the eventual return on investment on the pledged assets far exceeds the interest rate of the loan acquired. This also brings down the tax rates levied on the pledged securities providing pledgers benefits on both ends. It also allows people to become property owners without down payments. This is also called a secured loan and involves the transfer of securities/collateral to the lender’s name until the loan is paid in full. It does not involve selling the securities, just transfer of deeds to a different name.

  • Hypothecate Pledging

In this scenario, there’s no transfer of deeds to the lender’s name in order to pledge assets as collateral for borrowing loans. The borrower retains the rights to the pledged assets like a house or a portfolio of securities with the understanding that the lender may take possession of the same should the borrower fail to pay the loan dues.

Pros and Cons of Pledging Assets

Pledging assets help secure loans, provides tax sops, brings down the down payment sum required to take possession of a property, get reduced interest rates, while offering assurance to the lender that their money can be recovered in any eventuality.

On the flip side, failure to pay up the money owed will result in the double whammy of losing both the property and the collateral pledged towards securing the loan. Down payments might not be required, but interest will be levied on the full price of the borrowed loan. In the long term, the borrower may end up paying more for the property than its actual value.

References for Pledging

Academic Research on Pledging Assets as Collateral

A Form of Depression Finance–Corporations Pledging Their Own Bonds, Hatch, S. (1933). Harv. L. Rev., 47, 1093. This article takes a look at corporate financing and the phenomenon of pledging their own securities as collateral to secure loans.

The Research of Risk Management Basis of Warehouse Receipt Pledging [J], Xiaoyan, Y. J. C. Y. R. (2008). China Market, 2, 005. This thesis aims to provide safeguard measures for logistic providers dealing with Warehouse Receipt Pledge (WRP).

Effect analysis on supply chain performance based on inventory pledging financing, Ximei, S., Guokun, Z., & Ying, W. (2014). Journal of Shenzhen University Science and Engineering, 31(3), 317-324. This journal analyses the effects of financing by Inventory Pledging on the performance of supply chain management.

Pledging oil palms: a case study on obtaining rural credit in Nigeria, Abasiekong, E. M. (1981). African Studies Review, 24(1), 73-82. This paper presents a case study on the practice of Palm Oil Pledging financing in Nigeria.

Shareholder Wealth Consequences of Insider Pledging of Company Stock as Collateral for Personal Loans, Dou, Y., Masulis, R., & Zein, J. (2017). This paper looks at corporate insiders pledging their securities to secure personal financing and its implications on shareholders’ wealth.

Designing the optimal strategies for supply chain financing under warehouse receipt pledging with credit line, Yan, N., & Tian, T. (2011, December). In Industrial Engineering and Engineering Management (IEEM), 2011 IEEE International Conference on (pp. 274-278). IEEE. This journal takes a look at the best practices and strategies for WRP and supply chain financing.

Analysis of Supply Chain Carbon Asset Pledging Model Based on Carbon Trading, GAO, Z. J., & ZHAO, D. Z. (2013). Soft Science, 11, 021. This paper looks at the problems of supply chain financing and analyses the application of the Carbon Asset Pledging model as a solution.

Steel Products’ Pledging Rate Based on Value-at-Risk Model, Yang, H., Fang, Y., Zhou, J., & Zhou, Y. (2012, August). In Business Intelligence and Financial Engineering (BIFE), 2012 Fifth International Conference on (pp. 332-336). IEEE. This paper introduces the Value-at-Risk model based on empirical research and analysis for application in evaluating pledging rates for steel products.

Insider share-pledging and firm risk, Anderson, R., & Puleo, M. (2015, February). In Southwestern Finance Association 2015 Conference. This paper takes a look at the risks for firms and shareholders when insiders pledge their vested securities for personal financing.

Pledging integrity: oaths as forms of business ethics management, de Bruin, B. (2016). Journal of business ethics, 136(1), 23-42. This paper looks at corporate integrity, business ethics and management especially in light of Pledging firm’s assets to secure financing.

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