Pledge: Definition, Example and Related Terms

A pledge is a legal arrangement where a debtor (known as the pledgor) transfers possession, but not ownership, of a property or item to a creditor (known as the pledgee) as security for fulfilling an obligation, typically the repayment of a debt. It's akin to a promise backed by tangible assets, ensuring the creditor that they have a form of collateral that can be used to recoup the owed amount if the pledgor defaults.

In commercial contexts, a pledge can involve various types of property, such as vehicles, stocks, or jewelry, depending on what the debtor decides to offer and what the creditor accepts. The key aspect of a pledge is that the ownership of the pledged item remains with the pledgor. However, the pledgee gains a possessory interest, meaning they can hold onto the item until the debt is satisfied.

For example, if someone takes out a loan and pledges their car as collateral, they can still own the car but may have to leave it in the creditor's hands until the loan is repaid. If the borrower defaults on the loan, the lender might have the right to sell the car to recoup the debt.

Understanding pledges is crucial in contract law because they outline the rights and responsibilities of both parties involved. It can also provide assurance to creditors about the recoverability of their loans, thus influencing lending decisions.