A person applies for a pledged loan by placing security with the lender in the form of a pledge. The possession of the property remains with the borrower. However, the law has permitted the lender to sell the property and recover the loan amount in case of default. In case the borrower is pledging financial instruments like shares and debentures, the borrower has the right to retain the dividend earned from the financial instrument.
Features of a pledged asset loan
- The client can finance the full amount of the purchase price of residential property.
- The pledger can place a combined pledge of two or more assets. The assets can be in combination like shares and real estate property.
- In the case of 100% financing down payment gets eliminated. This is generally followed in case of Car pledge [รับจำนำรถยนต์, which is the term in Thai].
- Pledging of an asset helps the pledger to avoid any type of tax penalties and capital gain tax.
- In case of a reduction in the value of the pledged asset, the pledgee may demand additional funds from the pledger.
- A pledgee is allowed to sell the property and recover its loan amount in case of default by the pledger.
Advantages and disadvantages of a pledged asset loan
- Advantages: One of the biggest advantages of pledging an asset is that the title of the asset remains with the pledger. Only the possession is transferred. It also helps to avoid payment of tax from the sale of a property because there is no actual selling of property in a pledge.
- Disadvantages: One of the disadvantages of pledged asset loan is that the right to make a free investment in securities is limited especially in case of investments which come with risk like derivatives. In case the value of the asset goes down the lender may ask for additional funds.