Difference between Lien and Pledge

In a money driven world, individuals, organizations and businesses require additional funds for expansion, investment and sustainability. These funds can be borrowed from another individual or financial institution such as banks etc. However, in order to provide a guarantee that the funds will be returned, borrowers will have to back the amount with some sort of collateral, the value of which must at least be equivalent to the value of the borrowed amount. Liens and pledges are some of the security options at the disposal of the lender.

While both have similar implications – protecting the interest of the lender, there are some differences in how the two options can be exercised. Liens are a form of pledge, where the two concerning parties are in an agreement which can be backed by the law. For instance, a mortgage lien may be a voluntary association between the two parties, while tax liens are agreements which will have clear cut legal implications. A pledge on the other hand, is a simple contract between two parties, created to ensure that the funds are repaid and obligations and services are provided. They can also differ, depending on the nature of the contract.

In a lien, the lender does not have the right to sell the asset but can detain it as long as the amount or obligation is not met. This is usually because the lender does not possess the title to the asset. However, in a pledge, the lender or pledgee can sell the asset and recover losses as he or she is the official holder of the asset’s title. Lien contracts usually come into play when both parties are negotiating an immovable object such as a real estate property. However, pledges can be  about movable property as well.

Instructions

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    Lien

    It is the legal right to possess an asset of the other party until the debt or any similar obligation is not paid out. The lender will detain the asset but may not be able to sell it, unless stated in the contract. There are various types of lien – mortgage, construction, tax and agriculture.

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    Pledge

    It is a contract between the lender (pledger) and the borrower (pledgee) where the latter offers the former an asset against the payment he or she owes. In case that payment is not made, the lender has the right to sell that asset.

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