What is a pledge loan? A pledge loan is a form of secured loan wherein you pledge an asset, i.e., gold, fixed deposits, securities or any other form of valuables with a bank or any other financial institution, to secure a loan.
In keeping with contrast to unsecured loans, when lenders do not have any security, they base their decision on all your previous credit histories only and keep the risk minimal to both the lender and the borrower, pledged loan are secured by the presence of a tangible asset.
Getting to know about the Concept of a Pledge Loan
Pledge loan is target to individuals or businesses who require cash flow very fast without selling their valuable assets.
Here’s how it works:
- The borrower gives a pledge of an asset (gold, stocks, mutual funds or FDs).
- The lender evaluates the worth of the asset.
- The sanctioned amount of the loan is as a percentage of the asset value.
- Until the loan is repaid, the asset is held by the lender.
- The pledged asset comes back safely once the repayment has been made.
This is because with this system the borrower is able to get the money on short notice and the lender remains safe with the pledged item.
Features of a Pledge Loan
The following are the main characteristics that pledge loan is appealing to the borrowers:
Secured Loan Type: Collateral secured, lowering the risk by the lender.
Speedy Disbursement: The loan is secured, and therefore approved speedily.
Flexible Repayment: A variety of lenders have got flexible tenure and EMI.
Favourable Interest Rates: Since the risk is reduced, interest rates tend to be favourable as compared to unsecured loans.
Asset Protection: During the loan term, the borrower is still in possession of the asset.
Pledgeable Types of Assets
Pledge loans have different types of collateral that are accepted by different lenders. Here are the common ones:
- Gold or Jewelry: It is a loan favored by individuals who want short term loans.
- Fixed Deposits: the FD pledged loans are very fast and risk-free.
- Shares and Mutual Funds: It is possible to commit the investments to collect funds.
- Insurance Policies: There are lenders who take in endowment or money-back policies.
- Property Documents: Property pledges can be done in case of bigger loans.
How Does a Pledge Loan Work? Step-by-Step Process
Knowing how it works may assist you in making a wise choice:
Identify Collateral: Select an asset that you want to pledge.
Valuation: The lender determines its market value.
Loan Approval: Approved percentage depends on the value of the assets (normally 70-90 percent) is approved.
Writing: Sign the pledge agreement and full KYC.
Disbursement: The approved value would be added to your account.
Repayment: Make regular EMIs or a lump sum in accordance with the agreement.
Asset Release: At the time of clearing the loan, your pledged asset is released back to you.
Favorable aspects of Pledging a Loan
Why do pledge loans have lots of borrowers:
Fast Processing of Money: Fast approval and less paperwork.
No Asset Sale Requirement: You are able to keep possession of valuable things.
Lower Interest Rates: In contrast to personal loans or unsecured loan.
Regular Repayment: This improves your credit history.
Flexible Usage: The money will be spent on any personal/business purpose.
Demerits of a Pledge Loan
Even though pledging loans have a lot of advantages, you ought to know that they have few disadvantages as well:
Possibility of Forfeiting the Property: In case of default on repayment, then the loan issuer can be sold the collateral.
Restricted Loan Value: It is not income but asset value-based.
Processing Fees: There are those lenders who impose valuation or documentation charges.
Asset Lock-In: The lender does not give up possession of the asset until it has been fully paid.
Distinction between Pledge Loan and other Secured Loans
| Aspect | Pledge Loan | Mortgage Loan | Gold Loan |
|---|---|---|---|
| Collateral Type | Movable assets (FDs, shares, gold) | Immovable property | Gold/Jewelry |
| Asset Custody | Held by lender | Held by lender | Held by lender |
| Loan Tenure | Short to medium | Long term | Short term |
| Loan Basis | Asset market value | Property value | Gold value/purity |
Eligibility Requirement of a Pledge Loan
The lenders might have slightly different rules, but in general, the eligibility requirements are:
- Applicant should be 18 years and above.
- Tidy must have a valid ID and address evidence.
- Should possess the asset pledged.
- Must have a fairly stable income (in case of certain types of loans).
Forms Needed to secure a Pledge Loan
- Identity Proof (PAN, Aadhaar, Passport)
- Document Proof (Utility bill, Driving License, etc.)
- Evidence Of the possession of the pledged asset.
- Provision of income (where necessary by the lender)
- Passport-size photographs
When Is a Pledge Loan an option?
You should take a pledge loan in case:
You require money badly but you do not wish to sell your assets.
You possess investments or valuables which may be pledged as a security.
You desire interest rates reduced and faster processing.
You need short term liquidity either business or personal.
FAQs
What is a pledge loan simply put?
A secured loan is known as a pledge loan in which you use an asset such as gold or shares or fixed deposits as security.
What are the advantages of pledge loan?
It provides instant cash, reduced interest rates, and allows you to retain ownership of your asset and borrow against the value of your asset.
May I swear my mutual funds or stocks?
Yes, lots of lenders will accept your pledging of financial instruments such as shares, bonds, or mutual funds in order to secure a pledge loan.
What will become of me in case I fail to pay pledge loan?
In case of default in repayment, the lender can either sell or liquidate the pledged asset to get back the loan.
What is a better loan compared to a personal loan, a pledge loan?
Yes, in many cases. Pledge loan is normally associated with lower interest rates, greater answers and faster disbursement compared to personal loan.