The pledge or pledge is the one granted in exchange for an object as collateral . That is, to access this type of financing, the beneficiary must deliver in custody a movable property that is called a pledge.
The pledge credits are not supported by the expected future income of the applicant. Instead, they are backed by luxury items such as works of art or jewelry. These goods go through an appraisal process to estimate their commercial value.
Pledge loans are typical of pawn shops. However, they are also granted by microfinance entities as savings banks .
One of the conditions of the pledge loan is that the creditor keeps the guarantee in custody to ensure compliance with the obligation.
The debtor recovers the good pawn once he meets the repayment of the principal plus interest. In case of default, the creditor proceeds to sell or auction the pledge through a public auction.
Another fact to take into account is that the period of indebtedness may be extended in exchange for the lender keeping the guarantee in its custody.
History of pledge or pledge loans
The pledge loans originated in Italy in the fifteenth century. At that time, low-income people did not have access to credit because interest rates bordered between 30% and 200% annually.
Then, the Franciscan monks founded the mountains of piety, charitable organizations that granted interest-free loans. This, in exchange for a pledge under guarantee.
Advantages of pledge loans
One of the advantages of pledge credit is that it can be useful for those people about whom there is no information in the financial system . This can happen, for example, if the individual does not have a bank account.
Similarly, the pledge credit can be a solution if the user does not have a good track record. That is, if you have stopped paying a loan, for example. Given this, banks will hardly be willing to approve new financing.
Another advantage of the pledge loan is the speed with which it is granted. Normally only the beneficiary’s identity document is required. On the other hand, common loans require the presentation of certificates that allow estimating the average income per month the applicant receives.
It is also important to mention that the provider is always under the supervision of the competent state body such as the Bank of Spain .
Disadvantages of pledged loans
Despite its flexibility, there are also disadvantages in pledged loans. First, they imply that the individual may have to part with an object that may have a high value not only monetary, but sentimental. In addition, the garment may be damaged while engaged.
It should also be noted that the creditor may declare the transaction invalid if he suspects, for example, that the lender is linked to money laundering. This, provided the contract contemplates it.