What is a Pledge Loan?
Have you ever needed money but couldn’t qualify for one at your bank or credit union? Maybe a pledge loan that you can get right now.
Usually, consumers borrow money from pledge loans and secure them with a valuable object or property. Read the article to the bottom line to discover all about this type of loan.
Table of Contents
- What Does a Pledged Loan Mean?
- What Is a Pledged Asset?
- What is the Example of a Pledge Loan?
- Alternative Options to Pledge Asset Loans
- Bottom Line
What Does a Pledged Loan Mean?
The definition says it’s a secured loan issued by your bank or other traditional financial institution. By its name, you pledge the collateral while borrowing money. Land, jewelry, stocks, bonds, and real estate may serve as pledges. Unlike an unsecured loan, you’ll get lower interest rates through this financial product. Also, such a loan is mainly available for high-income borrowers.
The maximum loan term may reach tens of years, depending on your pledged asset. Also, you must repay the loan until the value of your collateral has increased enough. Then, you could sell it and pay off your debt.
What Is a Pledged Asset?
A pledged asset is a piece of property given to a lender as collateral for personal loans. While you own the asset, the bank or credit union takes the partial ownership interest in the pledge assets used to secure the loans. If you don’t repay the loan on time, the lender might take the collateral and resell it to cover the debts. It must be something that can be sold at auction or in a private sale.
Pledged Asset Mortgage
A pledged asset mortgage is a collateralized loan provided to a borrower who has pledged an asset as security for the personal loans. The asset is a house or other real estate. As a borrower, you use this asset as collateral for the pledged loans, allowing you to borrow cash in better conditions than you may take with no collateral.
Qualifying for a Pledged-Asset Mortgage
To qualify for a pledged-asset mortgage, you must have investments with a higher value than a down payment sum. If you pledge security and its value decreases, the financial institution may require additional funds from you to increase the collateral’s value.
Sometimes the bank may put some restrictions to make sure the pledged assets are not used as risky investments. Plus, lenders impose a minimum income to get a pledged-asset mortgage. They just want you to afford the monthly payments. Among these requirements, they will look at your debt-to-income ratio (DTI) to check your actual financial situation.
Investments as Pledged Assets
You can use investments as collateral to secure the loan. It means you’ll lose your investment if you default on the loan. That’s why we recommend you assess all your savings and investments to avoid such financial risks.
Savings Account
Using your savings account to secure the loan is a great way to increase your borrowing power by avoiding paying higher interest rates on loans. As the loan balance reduces during repayment, the pledged amount in savings reduces as well. Just make sure your savings account has enough to serve as collateral.
What is the Example of a Pledge Loan?
One of the most common pledge loan examples is a collateralized mortgage loan. This type of loan allows you to use your home as collateral and borrow under better interest rates. It means that if you fail to repay the loan, the lender can take possession of your home.
Also, this pledged asset loan requires a third-party appraiser’s appraisal and documentation proving ownership of the property being used as collateral.
Alternative Options to Pledge Asset Loans
If you don’t have an asset to use for this secured loan, just try the following alternatives that will help you cover your expenses:
Unsecured Loans
An unsecured loan comes with higher interest rates, but it can be funded as quickly as a secured one. Usually, unsecured loans are short-term financial products that you repay in a lump sum or with fixed monthly installments. The maximum loan amount depends on your income and credit situation. For example, instead of taking a home equity loan against the value of your home, you can borrow the required sum with an unsecured home improvement loan (even with bad credit).
Using a Co-Signer
You can lower the interest charges and your chance of approval by relying on a co-signer. It’s a person that helps you apply for a loan by using their credit score or payment history. If you don’t repay the loan on time, the lender has the right to request the debt from your co-signer.
Bad Credit Loans
Have bad credit, but need money as soon as possible? Try applying for a bad credit loan. It’s also more expensive than a pledge loan, but it helps you borrow money despite your credit rating. A bad credit score is considered below 580, and there are many lenders that are ready to approve your loan application.
Bottom Line
Consider a pledge loan only if you understand its advantages and can make use of them. Although, it’s one way to quickly get a significant amount without waiting days for funding. We hope our small guide helped you to understand the financial risks and make an informed decision about pledge loans.
