Last updated on November 10th, 2023 at 04:39 pm
If you want to apply for loan with some kind of security like Gold, Vehicle, Buildings as a guarantee. To safeguard the loan, banks will create charge on the security you propose. There are three common types of charges banks and financial institutions create on the security namely Pledge, Hypothecation and Mortgage.
You might have heard one or more of these terms before, but if you do not know what they actually mean or differences between them, this post will be helpful for you.
Let us first understand what Pledge, Hypothecation and Mortgage means.
What is Pledge?
As per Sec. 172- Indian Contract Act-1872 Pledge is defined as ‘bailment of goods to secure repayment of debt or performance of a promise’.
Pledge has the following features.
- Possession & control of goods remain with bank and ownership remains with borrower.
- Bank can sell the goods in case of non-payment by giving notice of sale, which is mandatory.
- Bank has to take due care of the goods, insure it.
- Pledger should have clear title to goods, and any defect or hazardous nature should be intimated to pledgee.
- On repayment, the bank is bound to hand over possession of goods to the pledger.
What is Hypothecation?
Hypothecation is a charge created by a lender on movable assets like vehicles and machinery.
Hypothecation is defined as mortgage of movable property and will be converted into pledge on non-payment of debt by taking the possession through SERFAESI Act 2002.
There are two types of charges created through hypothecation and they are
- Fixed Charge
- Floating Charge
1. Fixed Charge
Fixed Charge is created for the specific and identifiable assets like machinery, vehicle etc.
2. Floating Charge
Floating charge is created on assets class, which is constantly changing and not the same. For example, in a retail business, Stock as a class will remain, but particular stocks will change.
Thus, the exact nature of stock is not known until the bank takes over the property. But in this case, both the possession and ownership is with the borrower. But the lender has a charge over the property.
What is Mortgage?
Mortgage is defined as transfer of interest in specific immovable property for securing present debt, and future debt or for performance of an engagement which may give rise to a pecuniary obligation.
Mortgage is defined in Transfer of Property Act-1882, there are several types of mortgages based on the security and charge created.
Thus, with the mortgage the borrower binds himself personally to repay the amount, failing which bank has right to sell the property through court or file suit for recovery.
Comparison: Pledge Vs Hypothecation Vs Mortgage
| Feature | Pledge | Hypothecation | Mortgage |
| Type of Security | Movable | Movable | Immovable |
| Defined | Indian Contract Act-1872 | SARFAESI Act 2002 | Transfer of Property Act-1882 |
| Possession | Lender (Bank) | Borrower | Borrower |
| Ownership | Borrower | Borrower | Borrower or Lender based on the type of Mortgage |
| Examples | Jewels (Gold), Deposits, Bonds, Savings Certificate, etc | Vehicles (Cars, Tractor, etc), Crops (For Agricultural loan), Stocks (For Retail Business), etc | Land and Buildings |
Conclusion
Though, all types of charges create a hold over the property in favor of the Lender. These types of Pledge, Hypothecation and Mortgage have a different purpose and the lenders are entitled to respective rights over the property.
Thus, understanding each type of Charge will help you in speeding up the processing time for loan.
We hope this post is helpful for you in understanding the differences between the type of charges. For more queries, feel free to contact us.
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