When obtaining a loan, two types of collateral are often used as collateral: firm pledge and mortgage. In simple words we will tell you what it is, how these two concepts differ and what the risks are with such collateral.
What is a hard bond?
Many people misunderstand the meaning of the word “solid”, which is used in this term, believing that it characterizes reliability, stability. However, this has nothing to do with reliability.
Hard pledge is this type of financial collateral, in which the property remains in the use of the one who pledges it.
Simply put, by transferring some of his property as a firm pledge, the pledger can continue to use it (live in a house, drive a car, use mortgaged land, goods in circulation, etc.), but cannot dispose of it (donate, sell etc.).
Recently, hard collateral has become more popular and widespread for securing loans than mortgages.
What is a mortgage?
Mortgage is the opposite of hard collateral for securing loans and credits. Its main difference is that the pledged property is transferred to the holder of the pledge.
That is, if, with a firm pledge, the owner can continue to use the pledged property, then with the mortgage, he loses this opportunity, formally remaining the owner.
As an example, we can cite household appliances, electronic gadgets, jewelry – everything that is left in a pawnshop for storage until the payment of the loan and interest received.
What is more profitable than a firm pledge or a mortgage?
Naturally, for an ordinary person, a firm pledge looks preferable due to the fact that it is possible to continue to use the pledged property. However, a firm collateral is more profitable for the lender, despite the fact that there is a possibility of damage or even complete loss.
The thing is that when securing a loan with a mortgage, the lender must store the mortgaged property somewhere, and this implies additional costs. Therefore, lenders most often resort to securing a firm pledge, and in order to reduce their risks, insurance of the pledged property is a prerequisite. This type of collateral is used by banks. In turn, the mortgage is more in demand when obtaining a lombard loan: here the goods lie and await redemption.
The legal rules for the use of a firm pledge and mortgage are determined by the regulations and codes of each individual state.