Cash Collateral Pledge Agreement is a contract between borrower and lender. This agreement is basically borrower’s pledge of a particular property to a lender, to secure reimbursement of a loan. The security that collateral offers usually allows financiers to agree with a lesser interest rate on loans that have a guarantee of the collateral.
Purpose of a Cash Collateral Pledge Agreement:
Cash Collateral Agreement safeguards the legal right of the borrower to pledge an asset and provide the creditor the legal right to claim that property in the presence of legal authority if the borrower fails to repay the loan.
When Do You Need a Cash Collateral Pledge Agreement?
When a borrower keeps some assets that secure a loan from a creditor, both parties need to sign this agreement. The borrower pledges a property or an asset to the lender. Hypothecation or pledging asset does not make the financier become the possessor of the property. The borrower holds the possession on the property unless he/she is incapable of paying back the loan in time.
Inclusions in Cash Collateral Pledge Agreement
Cash Collateral Agreement mentions the profile of the borrower and the profile of the details about the lender. This contract elaborately explains the terms and conditions of the agreement, the information on the asset or property, the loan amount, the repayment frequency the tenure of the loan, the rights, the legal steps which the lender can take if the borrower fails to repay the loan and liabilities, etc.
Cash Collateral Agreement shall also comprise the information about the cash collateral accounting treatment if the party is using a bank account. Through the cash collateral account, the entire transaction takes place.
How to Draft Cash Collateral Pledge Agreement?
Here are the details about drafting a cash collateral agreement:
- The language of the agreement should always be simple and understandable by the pledger. The general format is the best way to draft a Cash Collateral Pledge Contract.
- Supporting documentation of identification of both parties is essential.
- The details about the asset or the property need to be included.
- The loan amount and repayment tenure also need to be clearly mentioned in the contract.
- Technical and legal terms need to be elaborated to avoid future confusions.
- Proper punctuation is necessary to convey the actual meaning. Incorrect use of punctuation or conjunction can change the whole purpose of the sentence.
- Highlighting the sections and points is essential. For this, one can use numbers.
- Authorization on every page is necessary. It proves that the parties are aware of all the details related to the agreement
- Future alterations should be accepted under the agreement of both the parties.
- Avoiding jargons are the best idea to draft an agreement.
- The contract should also mention about the legal step which the lender can take in case of any failure of reimbursement of the loan,
- The agreement comprises all the key terms of the agreement that apply to the collateral pledged by the debtor to the investor. Both the parties sign this contract, and the witnesses sign to confirm that both parties have willingly entered the contract after understanding the clauses. After that, the agreement notarized by the public notary.
Benefits of Cash Collateral Pledge Agreement
- A cash collateral agreement offers maximum security to any loan amount given out.
- It assures the lender about the repayment and also secures them with the asset in case of a worse situation.
- The estimate of the security asset remains higher than the loan amount, which is stated in the agreement, along with the tenure of the loan and the loan amount.
- Signing a Cash Collateral Agreement means one can stay rest assured about the fact that the pledged collateral will remain safe throughout the loan tenure.
- It also assures the borrower about getting back the security asset on paying the loan entirely.
[ Also Read: Pledge Agreement ]
Clauses in Cash Collateral Pledge Agreement
- Details of the borrower.
- Information on the lender.
- Information on the asset or property for which the loan is needed.
- Loan amount.
- Reimbursement Tenure.
- Ownership rights
- Rights and liabilities of Both Parties
- Legal steps to be taken on the failure of repayment of the loan
What Happens When You Violate the Cash Collateral Pledge Agreement
The incapability of reimbursement the loan – as cited in a Cash Collateral Pledge Agreement – legally permits a financier to claim against the pledged property and make it his own. The creditor trades off the property to get back the loan amount, and the borrower loses ownership of the collateral.
We have elaborately explained the purpose, benefits, and the way to draft a cash collateral pledge agreement. If you are willing to get sample clauses of the cash collateral pledge agreement in PDF files, then you can download collateral pledge agreement form here by clicking on the download link adjacent to the title.
Sample for Cash Collateral Pledge Agreement
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