A pledge is a type of security interest in which a lender takes possession of personal property as security for an obligation. Both the action of offering the property as a security interest and the actual property involved are referred to as a pledge. Initially, the lender's possessory interest is subject to the rules of a bailment or other type of deposit. While the lender is in possession of the property, they are not the owner of the property and cannot do with it as they please. If the borrower fails to perform as agreed, the lender may sell the personal property and keep the proceeds. Pledges are common in the fields of secured transactions, securities regulation, and business organizations.
For a pledge to be valid at common law, courts generally held that the lending party must be in actual possession of the pledge, in order to give notice to third parties that property apparently owned by the debtor was subject to a security interest. While the concept of pledges originates in the common law, the Uniform Commercial Code regulates pledges under §9-313, providing for possession by the secured party to perfect a security interest.
The term pledge may also be used to refer merely to a binding promise, similar to an oath.
[Last updated in February of 2024 by the Wex Definitions Team]