Pledged-security

Pledged security refers to an asset that a borrower offers to a lender as collateral for a loan. This asset acts as a guarantee that the borrower will repay the debt. If the borrower defaults on the loan, the lender has the right to seize and sell the pledged security to recover the outstanding balance. Common examples include real estate (mortgages), stocks and bonds (margin loans), and other valuable property. The value of the pledged security often exceeds the loan amount to mitigate the lender's risk. The security can be physical or digital, and legal frameworks govern the processes involved in pledging and reclaiming these assets.

Pledged-security meaning with examples

• To secure a business loan, the entrepreneur *pledged* their commercial property as *security*. The lender assessed the property's value and determined the loan amount based on this collateral. Should the business fail to meet its repayment obligations, the lender could foreclose on the property. This arrangement provides financial security for the lender, allowing them to offer more favorable loan terms to the borrower, because if the terms aren't met, they have an asset to obtain their initial investment.
• A stock investor decided to take out a margin loan. They *pledged* their existing portfolio of blue-chip stocks as *security* for the loan. The brokerage firm used these stocks as collateral, allowing the investor to borrow funds to purchase more stocks. The value of the pledged stocks was monitored closely, and the investor had to maintain a certain margin level. If the stock value declined, the investor would receive a margin call and would have to deposit more funds, or liquidate positions.
• A consumer wanted to purchase a new car. The dealership required them to *pledge* the car itself as *security* for the auto loan. If they defaulted on their monthly payments, the dealership could repossess the vehicle. This collateral arrangement makes it easier for consumers to obtain car loans. Banks and lending institutions commonly use this model to mitigate risk in case the client fails to keep to the agreed-upon loan terms for any reason.
• A company needed short-term financing to cover its payroll. They decided to *pledge* their accounts receivable (unpaid invoices from customers) as *security* for a factoring loan. The lender advanced a portion of the receivables' face value. Once the invoices were paid by the customers, the lender would receive repayment. This use is commonly used in companies and lending institutions that seek to provide the client with quick money.