Short Answer
A pledge loan is a type of secured loan in which you use an asset you already own, such as money in a savings account or a certificate of deposit (CD), as collateral for the loan. Because the lender has collateral backing the loan, the interest rate may be lower than on some unsecured loans. If you fail to repay the loan, the lender may have the right to use the pledged asset to cover the debt.
Detailed Answer
How Does a Pledge Loan Work?
With a pledge loan, you give the lender a security interest in an asset you own. A common example is pledging money in a savings account or CD.
For example, suppose you have $10,000 in a savings account and a bank allows you to take a $7,000 pledge loan using that savings as collateral. The lender may restrict your access to the pledged funds while the loan is outstanding.
You then make regular loan payments according to the agreed terms. Once the loan is fully repaid, the lender generally releases its security interest in the pledged asset.
What Can Be Used as Collateral?
The collateral depends on the lender and loan product. Common examples include:
- Savings accounts
- Certificates of deposit (CDs)
- Cash accounts
- Investment assets
- Vehicles or other valuable property
Pledge loans specifically commonly use savings or CD funds as collateral.
What Happens to Your Savings?
In many pledge-loan arrangements, your savings remain in the account but are restricted or pledged to the lender while the loan is outstanding.
This means you may not have normal access to the pledged funds until the loan is repaid. The exact restrictions depend on the lender’s agreement.
What Happens If You Don’t Repay?
Because a pledge loan is secured, the lender has rights to the collateral if you default, subject to the loan agreement and applicable law.
For example, if your savings account was pledged as collateral, the lender may be able to use those funds to satisfy the unpaid debt.
Can a Pledge Loan Help Build Credit?
It can, depending on the lender.
Some banks and credit unions report payment activity to the credit bureaus. Making payments on time can therefore help establish or build a credit history. However, not every lender reports every pledge loan, so you should ask the lender before applying.
Pledge Loan vs. Unsecured Loan
The main difference is collateral.
A pledge loan is secured by an asset, while an unsecured loan does not require collateral. Because a secured loan gives the lender an asset to recover if the borrower defaults, secured loans may have lower interest rates than comparable unsecured loans.
Final Answer
A pledge loan is a secured loan where you pledge an asset, commonly savings or a CD, as collateral. You receive the loan while the pledged asset secures the lender’s interest. These loans can offer relatively favorable rates and may help build credit when the lender reports payments, but the main risk is that you could lose access to or potentially lose the pledged asset if you fail to repay the loan.