A pledged asset is a valuable item a borrower owns that serves as collateral for a loan. Pledged assets can include real estate, equipment, investment accounts, and more. Lenders are given an ownership interest in the pledged assets, which they can seize if the loan is not paid in full.
Below, we’ll dive deeper into what can be used as a pledged asset, why collateral may be necessary, and what the alternatives are to pledging assets for a loan.
Definition and Examples of Pledged Assets
Lenders sometimes require collateral to issue a loan. This collateral helps ensure the lender will be repaid. If the borrower doesn't pay back the loan as promised, the lender can take the collateral.
If a borrower is taking out a loan to purchase a particular asset, such as a home or a 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 too little equity in the asset being purchased. 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 beyond the home or vehicle.
Pledged assets can serve as this additional collateral for a loan. These assets are other items of value, such as an investment account for individuals or accounts receivable for businesses. For example, Wells Fargo Advisors and Charles Schwab Bank both offer securities-based borrowing.
The borrower retains ownership of the pledged assets but gives the lender a legal interest in them while there is an outstanding balance on the loan. If the borrower doesn't repay the loan, the lender can take the pledged assets.
How Pledged Assets Work
Lenders may require pledged assets to ensure there is sufficient collateral to repay a loan if the borrower fails to fulfill their repayment obligations. Lenders may also require 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, in addition to the lender putting money on the line by making the loan.
Many types of valuable assets can be pledged as collateral, including securities such as stocks and bonds. If assets with an uncertain value are pledged as collateral, a lender may require an appraisal of those assets to ensure their values are sufficiently high enough to guarantee the loan.
Here’s an example of how pledged assets work. Let’s say a businessperson wants to borrow $2 million for a new venture. The lender could require them to pledge their investment account as collateral for the large loan. All of the assets in the investment account, such as stocks and bonds, would be pledged, and the lender would have a legal claim to them if the businessperson defaulted.
The businessperson in this case would still own the stocks and bonds, and would be able to manage the account. But if they failed to fulfill loan obligations, the lender could take these assets.
If you have pledged assets, you are required to maintain their value. For example, if your investment account is a pledged asset, the lender may require the balance to remain above a certain amount (often, the outstanding loan balance). Based on your contract with your lender, you likely will not be allowed to withdraw or trade in the account if doing so would reduce the account's value below the allowable limit.
Alternatives to Pledged Assets
Unsecured loans are one alternative to needing pledge assets. There is no collateral needed with unsecured loans. The lender makes the loan based entirely on your promise to repay it. Since there is nothing guaranteeing the loan, it may be more difficult for the lender to collect the money in the event of a default.
An unsecured loan can present less risk to a borrower since the borrower is not putting assets on the line. However, unsecured loans are riskier for lenders because there's nothing guaranteeing payment other than the borrower's signature on the loan agreement. It can sometimes be more difficult to gain approval for an unsecured loan rather than one backed by pledged assets, and loans without collateral often have higher interest rates and require borrowers to have good or better credit.
If you have bad credit and need a loan, you may need to pledge assets in order to secure one. If you do not have anything you can use as collateral for a secured loan, you may need the help of a co-signer to get an unsecured loan. Consider all of your options for secured and unsecured loans before applying.
- Pledged assets are items of value that can be used as collateral to guarantee a loan.
- Lenders may require pledged assets to protect against losses and to ensure borrowers have a financial interest in purchases that they are financing.
- Real estate, business inventory, investment accounts, and accounts receivable are examples of pledged assets.
- Borrowers risk the assets they pledge, but it may be easier and cheaper to get a loan backed by pledged assets.
- If you do not want to pledge assets to guarantee a loan, you should review your unsecured loan options.