Pledged asset is used to secure loan. It is an asset that cannot be sold by borrower, because it pledges loan. For example, lender may ask borrower to put some amount of money on special account that will be blocked until the loan is paid. Other pledged asset can be stocks.
Pledged asset reduces level of risk for lender. Therefore it is possible for borrower to obtain loan with lower interest rate. It can be beneficial for both sides of agreement. Moreover the borrower can still earn money on pledged asset if the asset is put on high-interest account or value of stocks increases.
However, pledged asset value can also decrease in time. Therefore banks usually require higher value of pledged asset than the loan value. If the value of pledged asset drops significantly, bank can require additional pledged assets to secure the loan.
- Singh, M. M. (2011). Velocity of pledged collateral: analysis and implications (No. 11-256). International Monetary Fund.
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