We all need loans at some point in our lives for buying a home or a car or maybe a refrigerator. Easy loans and EMIs have made buying stuff easier. So, here we are discussing different types of loans. Especially the difference between Pledge, Hypothecation, and Mortgage.
Pledge, Hypothecation, and Mortgage all are different types of charges created on the assets that have been kept as a security with the lender. The difference between them boils down to who has the possession of assets and the kind of assets you are taking the loan for.
For example, Hypothecation is for moving goods like cars, trucks, etc. While a mortgage is on the other end, it is for a non-movable property like houses, etc.
There is so much to know about all three of these. So, let’s begin.
Difference Between Pledge, Hypothecation, and Mortgage
|Purpose||To get an easy secured loan||Getting a small loan when you can also have the possession of the goods||To avail a bigger loan but at lower interest rates. And you also have the possession of the goods.|
|Type of assets||Movable||Movable||Immovable|
|Possession of asset||Pledgee||Hypothecator (Borrower)||Borrower|
|Owner of the asset||Pledger||Hypothecatee||Lender|
|Type of loan||Secured||Secured||Secured|
|Rights of the lender in case of default||Can sell the assets after issuing a notice to the borrower||Can sell after obtaining the possession of the goods||Can sell the assets and recover the loan amount from the proceeds|
|Who can use the goods||The Pledgee (lender) has the possession but cannot use the goods||Borrower||Borrower|
|Example||Gold Loan||Car Loan||Home Loan|
The most striking feature of Pledging is that the possession of the goods remains with the Pledgee or the lender. And you can pledge only movable goods, for example, Gold/Jewellery Loans, Advance against interests/stock, etc.
Considering it in detail, when you take a Gold loan, you are the Pledger, and the Loan company is the Pledgee. Here, the company keeps your Gold and gives you a certain amount of money in lieu. Now, the possession of the Gold is with the Loan company, and they have the full right to sell it in case of default. So, this is an example of a Pledge.
- Pledgee (lender) is legally bound to return the goods to the Pledger when the loan is paid off
- Also, the lender cannot use the goods during the custody. They are strictly meant for security.
- The pledged goods must be long-lasting
- The Pledger (borrower) must pay for the extraordinary expenses in the case of default. The payment of these expenses is the right of the lender and duty of the borrower.
Unlike Pledge, the highlight of Hypothecation is that the possession of goods remains with the borrower or the Hypothecator. And you can hypothecate only movable goods like cars, trucks, etc.
For example, when you buy a car on a loan. Your vehicle is the collateral, and the loan company owns it. But the possession of the vehicle remains with you. I mean, we do park our cars in our garage even when they are on loan. Unlike the Gold that is deposited with the bank, the hypothecated goods remain with the borrower.
Similarly, any hypothecated movable property remains with the borrower or the Hypothecator. But in case of default, the loan company or the Hypothecatee reserves the right to sell the vehicle. They can do so to recover the loan amount.
A thing to note here is that since the possession is not with the loan company, Hypothecation is risky. Thus, the company takes extra care while extending the loan facility. They also ensure that the security is safe and always available when required.
Also read: Home equity line of credit vs equity loan
- Loan periods are generally smaller in Hypothecation
- Also, the loan amount is lesser.
- Lastly, there are provisions so that the borrower cannot cheat the bank in any manner. If the bank smells mischief, then it holds the right to convert the Hypothecation to pledge at any time.
The mortgage is a commonly heard word even amongst the masses. Maybe because the home loan, a very popular loan, is a type of mortgage.
A mortgage is a charge created over any non-movable property like a house, plot, or anything attached to the earth. And the possession of this property remains with the borrower or the mortgagor. Since the property is a security, the mortgagee or the lender reserves the right to sell it if there is a default.
The most famous example is a home loan. The house is security against which we take a loan. But we stay in possession of the house and not the bank. However, the bank can sell it in case of default at any time.
- The loan amount is usually higher and the loan period longer
- The borrower cannot sell the property or house or plot unless he/she pays off the debt. It is so because a line in the registration document states that the security charge favors the lender.
Concluding our guide on the difference between Pledge, Hypothecation, and Mortgage, here is a summary.
All the three are basically a type of charge created on the security. In Pledge, the owner of the security is the borrower, but possession is with the lender. While in both Hypothecation and mortgage, the owner is the lender, and possession is with the borrower.
Speaking of what type of assets can be kept as security, Gold and similar items can be used for a pledge. And Movable goods like a car can be hypothecated. Lastly, immovable property like house, plot, etc. can be mortgaged.
So, this was all in our guide. We hope you liked the guide, and it was informative. And if you still have questions buzzing in your mind, please drop them below in the comments section. We will be glad to answer them.