When we ask for a loan from credit institutions, the mortgage is the most common legal figure used to guarantee that we will return the money. However, there are other options to access financing that are less known to consumers, such as the pledged credit .
What does this collateral loan consist of? At Hipotecas.com we explain how this financial product works .
Concept of pledging
To pledge, as established by the Royal Spanish Academy , consists of “giving or leaving something as collateral” , that is, through the pledged credit, one party delivers possession of a good to another person - physical or legal - as a guarantee of the fulfillment of an obligation.
The most representative case of pledging can be seen in pawnshops, where the client receives a certain sum of money, leaving an asset in these entities as a guarantee that he will repay the loan.
But the practical use of the loan pledge goes further and can be used to finance the purchase of shares - leaving said shares as collateral - to request a loan with which to pay the taxes of an inheritance - providing part of the assets as collateral. legacies - or to request funds for a project, by pledging a savings deposit, for example.
Therefore, pledging is another real right of guarantee , just as it happens with the mortgage . Now, while in the mortgage loan, the house is the guarantee for the debt and can be used by the person who receives the financing at any time. At this time, the pledged credit can be used for anything from shares or deposits to jewelry, vehicles and real estate, and possession passes to the person who provided the credit, without the applicant being able to use the asset.
In this way, when we satisfy the payment of the debt, we recover the pledged asset. Otherwise, the other party can execute its real right of guarantee and recover its money through the public auction of the pledged asset or , if this is void, through direct award to the creditor.
Loan Pledge Requirements
However, the formalization of a pledge contract is subject to a series of conditions, set out in articles 1,863 to 1,873 of the Civil Code and 320 to 324 of the Commercial Code for loans secured by securities admitted to trading:
- The asset provided as collateral must be capable of possession.
- This legal figure requires the transfer of possession from the owner to the creditor or a third party, who will guard the property for the duration of the pledged credit.
- During this time, the debtor may not dispose of the asset , nor transfer or modify the pledge.
- In order to have legal effect, the pledge must be reflected in a public deed.
Advantages and disadvantages of pledged credit
Once we know what a pledged loan is, we must ask ourselves what are its advantages and disadvantages compared to a conventional mortgage loan. As for the pros of this legal figure, we can mention the following:
- In pledging we have a wider range of assets to offer as a guarantee of payment . Thus, we can not only pledge a property, but also movable assets or financial products, such as shares or investment funds, as long as they reach the value of the loan granted.
- Although we do not enjoy possession of the asset during the duration of the contract, we do have the right to receive the profits it generates. Thus, for example, we can pledge a block of shares, but the dividends they produce are for us.
- The cost of establishing a pledged loan is lower than the costs of formalizing a mortgage (taxes, appraisals, registration, etc.), since we only need to record it in a public deed.
- Generally speaking, the interest rate applied to the pawn loan is usually lower than that established for mortgages.
- In pledged credit there are also no amortization and early cancellation fees that we can see in some mortgage loans.
- As for the advantages for the creditor, pledging prevents others from seizing this asset in the event that we have more debts, since possession is not in the hands of the obliged party.
- Likewise, the auction of the asset is not the only way the creditor will have to collect his debt, but, in the event that the pledge has lost value (shares that plummet, for example), he can resort to legal proceedings. to claim a refund .
However, pledged credit also presents a series of disadvantages :
- The first disadvantage of pledging is that the asset passes into the hands of another person, so we cannot enjoy it while the obligation exists.
- It is a financing alternative that banks restrict to clients with large assets , so that access to pledging is reserved for a select few.
- The loan repayment period is shorter than that of a mortgage, with a general duration of between 8 and 10 years.
In any case, it is advisable to be familiar with this legal concept in order to be able to analyse which option is most beneficial for us in cases where we need financing.