Short answer. The creditor chooses between two remedies. If he was deceived about the substance or quality of the thing pledged, he may demand another thing in its place, or he may call in the loan and demand immediate payment of the principal. He is not obliged to keep security that is not what he was told.
What the law says
If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing in its stead, or demand immediate payment of the principal obligation.
Civil Code, Article 2109 — Deceit on Substance/Quality. Read the full provision →
The rule in one sentence
Article 2109 provides that If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing in its stead, or demand immediate payment of the principal obligation. A pledge works because the creditor accepted one specific item as his security. If that item is not what he was told — gold-plated rather than gold, a lower grade of stone, a different model of machine — the basis on which he agreed to lend has failed. The article gives him a way out without requiring the whole transaction to be unwound.
Substance or quality
Substance is what the thing is; quality is how good it is of its kind. Both are covered, which matters, because most real disputes are about grade rather than identity. The article speaks of the creditor being deceived, so it is not enough that he made a poor bargain or valued the item optimistically on his own. Something must have been represented to him — expressly, or by the way the item was presented — that was untrue. A creditor who inspected the thing, knew exactly what it was, and later changed his mind about its worth is outside this provision.
Two remedies, and the choice is his
He may claim another thing in its stead — a replacement of real value — or he may demand immediate payment of the principal obligation, cutting the loan short. The second is the sharper option, because a debtor who cannot pay early is exposed at once. Note what the article does not say. It does not let the creditor keep or sell the item on his own say-so, and it does not by itself decide any claim for damages, which would depend on the wider law on fraud. Nor does it wipe out the debt, which remains owing whichever remedy he takes.
Pawnshops, and heading off the argument
A caution about pawned items: pawnshops are separately regulated, and a pawn transaction is governed by that regulation as well as by these general Civil Code rules, so the notices, periods and procedures that actually apply may differ from the general position set out here. Ask for the written terms and read them. In any pledge, both sides are protected by an honest description at the outset — have the item appraised, record what was said about it, and keep photographs. Where deception is alleged, act promptly rather than waiting for the loan to mature, and take advice, since claims carry time limits.