Hand pledge

A lender, such as a bank, has many options to create security for a loan - for example, by taking a lien on the borrower's assets such as chattels, property, car or similar.

Pledges can basically be divided into two types: hand pledges and subpledge.

In practice, it is estimated that in Denmark there are far more transactions with underpledges than with hand pledges. In this article, we focus on hand pledges and explore how lenders and creditors can use this type of pledge.

What is collateral?

A hand mortgage is a type of mortgage where the mortgagee has security over a physical asset and has control over that asset for all or part of the loan period. In short, it can be described as a situation where the pledgee literally has the pledgor's assets "in hand".

Examples of assets that are often used as collateral include:

• Expensive art
• Paintings
• Expensive watches
• Other valuable objects and chattels

These valuables are kept by the pledgee during the loan period. If the pledgor defaults, the pledgee can sell the asset to cover all or part of the defaulted amount.

What is the difference between mortgage and sub-mortgage?

The main difference between pledges and sub-pledges is whether the pledgee has physical control over the pledged asset:

• A pledge means that the pledgee has physical possession of the asset during the loan period.
• Underpledge means that the pledgee has a lien on an asset but does not have physical possession of it.

With underpledging, the asset typically remains in the custody of the pledgor, allowing the pledgor to continue using the asset - such as a car, real estate or a boat.

A classic example of a subordinated mortgage is a mortgage on a property where the borrower continues to live in the house and use it even though the property serves as security for the loan.

What is the purpose of a lien?

All loans and credit agreements between a lender and a borrower involve a credit risk that the loan will not be repaid - either in full or in part.

The lender has several options to reduce this risk, and one of them is to require collateral as security - either as a mortgage or a pledge.

Example:

• If a homeowner defaults on their obligations to the bank or mortgage company, the bank will typically have taken a mortgage on the property. In this case, the bank can sell the property, for example through a foreclosure auction, to cover its claim.

Pledges work in the same way. The bank can ask the borrower to pledge a valuable item. If the borrower defaults on the loan, the bank has physical possession of the asset and can sell it, auction it or otherwise realize its value to cover all or part of the defaulted amount.

This gives the lender stronger security as the asset is already in the possession of the mortgagee, making it easier and faster to recover the value if the loan defaults.