Acquire loan by pledging a security
When an asset is kept as collateral for a loan without the transfer of possession it is called a pledge. The ownership of the asset remains with the pledger only the possession is transferred to pledgee. The pledgee has the right to retain or sell the property in case of default. The pledger can keep any asset as a pledge like car, property, stocks, etc. An asset is asked as a pledge because it acts as a security for the amount lent to the pledger. If the pledger makes default in repayment, the pledgee can sell the property and recover the amount of loan. Car pledge [รับจํานํารถ, which is the term in Thai] is done for short term loans.
Pros of a pledged asset loan
- In case of pledged asset loan the ownership of the asset lies with the pledger. Pledgee only gets the possession of the asset.
- The pledger is saved from the payment of capital gains tax or tax penalties. It is because a pledge is not a sale of the property it is only transfer of possession for the time being.
- Pledging an asset helps to avoid the payment of hefty down payments. However, it is only applicable in some cases if the pledgee permits.
Cons of a pledged asset loan
- The right to trade the pledged asset is restricted in case the asset used as a pledge is shares, debentures, stocks, etc. according to the terms and conditions of the loan.
- In case of default in repayment of the loan by any means the pledger can lose the asset as a pledge. Pledging an asset comes with collateral risk of loss.
- If the value of the pledged asset depreciates in the future the pledgee may ask for additional funds from the pledger. It is done to bring the value of the pledge to its original value.