Difference Between Pledge, Hypothecation, Mortgage & Assignment

I this post you understand the difference Between Pledge, Hypothecation, Mortgage & Assignment and come to know why Banks and other Financial Institutions do Pledge, Hypothecation, Mortgage or Assignment
against your loan?

Most people nowadays require a loan to meet their financial requirements. This loan is for purchasing any goods or assets or any services. Anyone can take a loan from any financial institutions like Banks, Non-Banking Financial Company. To be safe from any fraud or default in payment, the moneylender institution keeps security against the loan provided to the borrower.

The institution creates a charge upon the security given by the borrower to the institution. The financial institutions use different charges for different types of the loan availed. The institution will indeed use any charge against your security irrespective of the loan amount or tenure. The charges discussed here are Pledge, Hypothecation, and Mortgage. So you could easily differentiate between Pledge, Hypothecation & Mortgage.

What is Pledge ?

Pledge, as defined as per section 172 of the Indian Contract Act, 1872, is the bailment of goods as a security for paying off debt. There are two parties involved in the case of Pledge. Pawnor and Pawnee. The bailor is known as Pawnor, and the bailee is known as Pawnee. The bailor or the Pawnor is the one who transfers the good as security. The bailee is, or the Pawnee is the one who receives this good as the security for the loan. In Pledge, Ownership rights are not transferred from the bailor to bailee. It is highly recommended for secured loans for an average tenure.

Pledge is a part of the bailment where the borrower (Pawnor) transfers only the possession of goods as security to the lender (Pawnee). The contract must be lawful, and it shouldn’t contain any terms that are prohibited by law. The goods to be transferred to the Pawnee must be durable and long-lasting. The Pawnor should deliver the goods to the Pawnee, and it is the duty of the Pawnee to make sure the goods are not damaged while being kept as security.

There are a few duties that need to be fulfilled by both the Pawnor and Pawnee in the agreement.

For the Pawnor –
– It is a must to pay back the loan by the tenure period as mentioned in the contract.
– In case of default, the Pawnor must bear the expense.

For the Pawnee –
– The Pawnee cannot use the good for personal use.
– Return the Good as received to the Pawnor on successful and complete repayment of the loan.

In case if the Pawn or fails to pay the loan in the given tenure period or as agreed in the contract, the Pawnee has the right to sell the good to incur expenses but only after providing notice to the Pawnor.
Pledge is often charged against Gold Loans, Jewelry Loans, and Stocks etc.

What is Hypothecation ?

Hypothecation is defined as “a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance, and includes floating charge and crystallization into fixed charge on movable property.” This is how Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act Defined Hypothecation. It is registered under section 125 of the Indian Companies Act, 1956.

Hypothecation is almost like Pledge with few changes in its characteristics. Although, the significant difference between Hypothecation and Pledge is that in Hypothecation, the possession of the goods remains with the borrower. It is recommended for Vehicle loans or Loans against securities.

Hypothecation is for a smaller period and charged on a smaller amount of loan. It is charged against movable assets like vehicles. Asset possession remains with the borrower, but if the borrower fails to pay the loan amount or the bank finds out any unlawful proceeding with the asset, the bank has the right to take custody of the asset.

What is Mortgage ?

The Mortgage is the transfer of an interest in specific immovable property to secure payment of money advanced by way of loan, existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability. It is registered under section 58 of the Transfer of the Property Act.

Unlike the last two charges, Mortgage is charged against immovable assets like buildings or land. There are two parties in the contract, the mortgagor (borrower) and the mortgagee (lender). The instrument on which the agreement is made is known as the mortgage deed. The details of the immovable asset must be specified in the deed. The Mortgage is charged against loans for a more extended period and a higher loan amount. The ownership remains with the borrower. If the mortgagor fails to pay the loan amount, the mortgagee can sell the asset and recover the amount from the selling value of the asset.

There are different types of Mortgage like Simple Mortgage, English Mortgage, and Anomalous Mortgage etc. This charge is created against Home Loans.

What is Assignment ?

An assignment is a type of agreement for transferring the ownership of property between two parties where one party transfers some or all his ownership rights (called Assignor) of a particular property owned by him to the other person/party (called Assignee). After Assignment, the property is transferred to the person receiving the property rights which is irrevocable. An assignment is generally used in case of an insurance policy or annuity.

To Sum Up, Pledge is an agreement between two parties, the Pawnor and the Pawnee where the possession of the Good is transferred. It is for an average period and a moderate amount of loans. The Pawnee cannot use the good for personal use.

Hypothecation is against movable assets, but the possession remains with the borrower, and the borrower cannot sell that asset until the repayment of the full loan amount.

A mortgage is for a longer tenure and a higher sum of loans. It is charged against immovable assets that are fixed to the earth, only like buildings. The mortgage deed has all the specified details about the agreement.

An assignment is transferring the ownership of property between two parties where one party transfers his ownership rights of a particular property to the other party which is generally used in case of an insurance policy or annuity.