What is difference between Pledge, Mortgage and Hypothecation?

Banking & Investment Financial management

What is difference between Pledge, Mortgage and Hypothecation

I have received some queries asking the difference between Pledge, Mortgage and Hypothecation. This question is normally asked in interviews in banking and even bankers are found confused about the little difference between these terms. To understand the difference between these terms first find the similarity in these terms:

  • All three are related to lending some money with security.
  • All the above terms are used for creating a charge on the assets given as a security by  the borrower to the lender to
  • Secure the repayment of money borrowed.

Key Differences:

Pledge

  • When lender of the money actually takes possession of an assets which was handed over by borrower to lender as a security. Lender retains the possession of assets untill the borrower repays the entire debt. In the case of default, lender has a right to sell the assets and adjust the proceeds against debt amount.
  • In Pledge, The Assets against which charge is created is a movable assets like Certificates, goods, Gold, Silver etc.
  • Possession of assets remains with Lender.
  • Examples are : Loan against Gold or Silver Or NSC.

Mortgage

  • When a person borrow some loan and for the security of repayment, a charge is created against immovable property land or building etc. For example, house loan is taken for building a house on a plot by creating charge against plot i.e. immovable property in the name of borrower. In the registration document of immovable property one line is added indicating the charge of lender. In case of Mortgage, the possession of immovable property generally remain with the borrower. Borrower will not be able to sell the property unless debt is repaid. because in the registration document of property a entry is made showing the charge on asset in favor of lender.
  • In case of Mortgage, the assets against which charge is created is an immovable assets like Land, Building etc.
  • Possession of assets remains with the borrower.
  • Examples are: House loan, Land CC limit etc.

Hypothecation

  • The term Hypothecation is used for creating a charge against an movable assets which is a security for repayment of debt. But possession of assets remain with the borrower. If the borrower, defaults, then first the lender have to first take the possession of assets and then to recover the debt he may sell the assets. For example, In car loan, bank gives loan for car by hypothecating car papers and car remains in the possession of borrower. Borrower will not be able to sell the car because there is hypothecation entry in the registration document of car.
  • In case of Hypothecation, the assets against which charge is created is a movable assets like Car, Vehicle, Stock of business, Debtors etc.
  • Possession of assets remains with Borrower.
  • Examples are: Car Finance , CC limit against Debtors or Stock, Vehicle loan etc.

I hope now you can clearly differentiate Pledge, Mortgage and Hypothecation.

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