Pledges and liens are quite similar in that they are both forms of security interest that serve to guarantee repayment of monies, fulfillment of commitments, or performance of services. Both parties can agree to create a lien, or the law can impose it. Conversely, a pledge can only be established through a legally binding contract.
Another key distinction is that a lien only grants the right to detain the assets or property, not the power to sell them, unless otherwise specified in the contract. Lenders often hold ownership to pledged assets until the debt is paid off. If the borrower defaults, the lender can sell the assets to recoup their losses. A lien can be placed on any property or asset, whereas a pledge can only be issued on tangible assets.
| LIEN | PLEDGE |
| Creditors can secure their loans by the creation of legal rights or interests in debtors’ property, known as liens, which do not necessitate the actual transfer of ownership. | In a pledge, one party to the loan agreement gives the other party legal title to an underlying asset so that the lender may secure the loan. |
| Liens allow creditors to secure their interests in debtors’ property without actually taking physical control of it. | The lender takes actual possession of the pledged asset as collateral, creating a possessory interest. |
| The creditor can acquire legal title to the property through a lien even if physical possession is not required. | Pledges rely heavily on possession. Until the borrower pays back the loan, the lender can take physical possession of the collateral. |
| Although a lien is a legal encumbrance, it does not transfer ownership. Instead, the debtor continues to own the property. | Even though the lender gains possession via a promise, the borrower still retains ownership. |
| Liens can be used on a wide variety of assets, including financial assets and real land. | For more concrete assets, like jewelry or stocks, a more particular pledge is appropriate. |
| It is common practice for creditors to initiate legal processes in order to seize or sell property that is subject to a lien in order to enforce the lien. | It is usually easier to enforce a promise. In the event of default, the lender can swiftly sell the pledged asset since they have physical control of it. |
