Legal Definitions - pledged account

A pledged account refers to a financial account, such as a savings account, checking account, or investment account, that has been designated as collateral to secure a loan or other financial obligation. When an account is pledged, the funds or assets within it are essentially set aside and made available to the lender if the borrower fails to meet the terms of their agreement. This arrangement provides security for the lender, reducing their risk.

• Example 1 (Personal Loan): Maria wants to take out a personal loan from her credit union but has a limited credit history. To reduce the risk for the credit union, she agrees to pledge a portion of her existing savings account as collateral. The credit union places a hold on $3,000 in her savings account. If Maria defaults on her loan payments, the credit union has the right to access those $3,000 from her pledged savings account to cover the outstanding debt.

  Explanation: Maria's savings account becomes a pledged account because a specific amount within it is formally committed as security for her loan, giving the credit union a claim to those funds if she defaults.

• Example 2 (Business Line of Credit): A small manufacturing company, "Innovate Tech," needs a flexible line of credit to manage its fluctuating inventory costs. Their bank requires collateral for the line of credit. Innovate Tech pledges its corporate investment account, which holds various marketable securities, to secure the credit. The bank places a lien on the investment account, meaning Innovate Tech cannot freely withdraw or sell the assets without the bank's permission until the line of credit is repaid.

  Explanation: The company's investment account is a pledged account because its assets are formally committed as collateral for the line of credit, providing the bank with a secured interest in those investments.

• Example 3 (Secured Credit Card): John is working to improve his credit score and applies for a secured credit card. To obtain the card, he is required to deposit $1,000 into a special savings account, which then serves as collateral for his credit limit. The credit card issuer holds these funds in a pledged account. If John fails to pay his credit card bill, the issuer can use the funds from this pledged account to cover his outstanding balance.

  Explanation: The special savings account John opened is a pledged account because the funds within it are specifically designated as security for his credit card, allowing the issuer to access them if he defaults on payments.