What Is The Difference Between Pledge And Hypothecation

What Is The Difference Between Pledge And Hypothecation

What Is The Difference Between Pledge And Hypothecation

Key Takeaways:

  • Pledge involves giving goods as collateral while hypothecation creates a charge on movable property.
  • In pledge, the lender holds physical possession of the assets, while in hypothecation, the borrower retains possession.
  • Pledge is commonly used for moveable assets like gold, jewelry, stocks, and NSCs, while hypothecation is often used for vehicles, stocks, and debtors.
  • In case of default, the lender can sell the pledged assets in pledge, while they can file a suit to take possession and sell the hypothecated assets in hypothecation.
  • These terms are legally defined under various acts such as the Indian Contract Act, SARFAESI Act, and Transfer of Property Act.

Characteristics of Pledge

Pledge is a form of bailment where goods are given as security for a debt or promise. In this arrangement, the possession of the pledged goods remains with the lender. Movable assets such as gold, jewelry, stocks, and NSCs can be pledged as collateral.

When it comes to a pledge, there are typically two main parties involved: the pledgor (borrower) and the pledgee (lender). The pledgor provides the goods as security, while the pledgee holds possession of the goods until the debt is repaid. This creates a sense of security for the lender, as they have control over the assets in case of default by the borrower.

In the event of a default, the lender has the right to sell the pledged assets to recover the debt amount. This provides a remedy for the lender and ensures that they can still recover the outstanding loan even if the borrower fails to fulfill their repayment obligations.

Types of Security in Pledge

When it comes to the types of security in pledge, there are two main categories: possessory security and non-possessory security. Possessory security involves physical possession of the pledged assets by the lender, while non-possessory security allows the borrower to retain possession of the assets while they are pledged.

Possessory security is more common in traditional forms of pledge, where the lender physically holds the assets until the debt is repaid. Non-possessory security, on the other hand, is prevalent in modern pledge arrangements, where the borrower retains possession of the assets but creates a charge on them in favor of the lender.

Type of Security Definition
Possessory Security The lender has physical possession of the pledged assets.
Non-Possessory Security The borrower retains possession of the assets while creating a charge in favor of the lender.

Overall, pledge offers a secure way for lenders to protect their interests when providing loans. By holding possession of the pledged assets and having the right to sell them in case of default, lenders can mitigate the risks associated with lending and ensure the recovery of their funds.

Characteristics of Hypothecation

In the world of finance, hypothecation plays a significant role as a method of securing loans. Understanding the characteristics of hypothecation can help borrowers and lenders navigate this form of security effectively.

Firstly, hypothecation involves the creation of a charge on movable property without the need for the borrower to physically deliver the assets to the lender. This means that the possession of the hypothecated property remains with the borrower throughout the duration of the loan.

Various types of movable assets can be hypothecated, including vehicles, stocks, and debtors. This flexibility allows borrowers to leverage a wide range of assets to secure their loans.

The parties involved in hypothecation are the hypothecator (borrower) and the hypothecatee (lender). The borrower pledges the assets as collateral to secure the loan, while the lender has the right to file a suit in case of default by the borrower.

In the event of default, the lender can take legal action to take possession of the hypothecated assets and sell them to recover the debt amount. This remedy for default provides lenders with a recourse to minimize their losses in case of non-payment by the borrower.

Conclusion

In conclusion, hypothecation is a unique form of security that allows borrowers to pledge movable assets without physically delivering them to the lender. With its distinct characteristics and legal framework defined under the SARFAESI Act, hypothecation provides a valuable tool for securing loans in the financial industry.

Table of comparison:

Criteria Pledge Hypothecation
Ownership The borrower retains ownership of the pledged asset. The borrower retains ownership of the hypothecated asset.
Possession The lender takes possession of the pledged asset as security for the loan. The borrower retains possession of the hypothecated asset.
Usage of Asset The borrower may lose the right to use the pledged asset until the loan is repaid. The borrower can continue to use the hypothecated asset for its intended purpose.
Risk for Lender Lower risk for the lender since they have possession of the pledged asset. Higher risk for the lender as they do not have possession of the hypothecated asset.
Transfer of Title No transfer of title occurs; the borrower retains full ownership rights. No transfer of title occurs; the borrower retains full ownership rights.
Default Consequences In case of default, the lender can sell the pledged asset to recover the loan amount. In case of default, the lender has a claim on the hypothecated asset but does not have possession.
Common in Common in secured loans involving tangible assets like jewelry, securities, or vehicles. Common in financial transactions where the borrower retains possession of assets, like loans against securities.
Release of Collateral Collateral is released upon full repayment of the loan. Collateral is released once the loan is repaid.
Examples Pawnbroking is an example where personal property is pledged. Loans against stocks or other securities are examples of hypothecation.
Legal Process Involves a legal process for the sale of the pledged asset in case of default. Generally involves a legal agreement without immediate transfer of possession.

FAQ

What is the difference between pledge and hypothecation?

Pledge is a form of security where goods are given as collateral against a loan, with the possession of the goods remaining with the lender. Hypothecation, on the other hand, is the creation of a charge on movable property without delivering the property to the lender, with the possession of the property remaining with the borrower.

What are the characteristics of pledge?

Pledge involves the pledgor (borrower) giving movable assets such as gold, jewelry, stocks, and NSCs as security. The possession of the pledged goods remains with the lender. In case of default by the borrower, the lender has the right to sell the pledged assets to recover the debt amount.

What are the characteristics of hypothecation?

Hypothecation involves the hypothecator (borrower) creating a charge on movable assets such as vehicles, stocks, and debtors without delivering the property to the lender. The possession of the hypothecated property remains with the borrower. In case of default by the borrower, the lender can file a suit to take possession of the hypothecated assets and sell them to recover the debt amount.

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