Pledge Vs Hypothecation Vs Mortgage Vs Assignment

Sooner or later, majority of people require loan in order to meet their financial requirement to purchase any asset or good. There are many financial institutions like banks, NBFCs, etc. which offer loans to the customers. From the point of view of the lender, it is always good to keep a security against given loan in order to safeguard it in case of any default by the borrower.

Whenever an Individual or a Non-Individual applies for a loan, the bank or the lender asks for any security for this purpose. Pledge, Hypothecation and Mortgage are different terms that are used to create a charge on the assets which is given by the borrower to the lender.

When an applicant wants to avail any loan, the bank or the lender always keeps a security in the form of some assets. The purpose behind keeping a security by the bank is that it has the right to sell that asset, in case the borrower defaults in repayment of the loan and realise the amount.

Pledge is used when the lender (Pledgee) takes actual possession of the asset pledged. In case of Hypothecation, possession of the asset remains with the borrower. Loan is given on security of immovable property, in case of Mortgage. Assignment is used when the owner of a contract (Assignor) handovers a contract to another party (Assignee). Assignment gives the assignee, right of all the responsibilities and all the benefits of the contract assigned.

What is Pledge?

Definition: As per Section 172 of the Indian Contract Act, 1872, Pledge is the bailment of goods as a security for the payment of a debt or performance of a promise. The bailor in case of Pledge is known as Pawnor and the bailee is known as Pawnee.

Borrower needs to provide the bank any asset or good that is worth the same amount or more than the loan which he is taking from the bank.

All about Pledge

• Pledge is a kind of Special Contract
• Pledge is a part of Bailment
• Pledge is a contract by which possession of goods or assets is transferred as a security
• Pledger or Pawnor is the person who gives goods as a security. He is the borrower
• Pledgee or Pawnee is the person who receives goods as a security. He is the lender
• Pledgee is bound to return pledged goods on the successful repayment of loan
• A pledgee has no right to use the goods pledged
• A Pledgee has the right to sell the goods pledged, on default after giving a notice to the Pledger

Essentials of Contract of Pledge

• There must be a Lawful Purpose
• The pledged goods must be long lasting
• Delivery of Goods/ Security
• Return of Goods

Duties of Pawnor (Pledger)

• Duty to repay the loan
• Duty to pay expenses in case of default

Right of Pawnor (Pledger)

• Right to redeem the goods pledged
• Right to receive the increase

Duties of Pawnee (Pledgee)

• Duty not to use pledged goods
• Duty to return the goods on the successful repayment of loan

Right of Pawnee (Pledgee)

• Right to retain the pledged goods
• Right to extraordinary expenses
• Right to sell the goods in case of default by the Pawnor

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What is Hypothecation?

Definition: As per Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 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".

Hypothecation is used as a security of movable assets while taking a loan from the bank. Here the possession of the security remains with the borrower instead of the lender. When the borrower is not able to repay the loan and its interest, then the bank has the right to sell the hypothecated asset such as car, two wheeler, etc. and recover the outstanding loan amount along with accrued interest.

All about Hypothecation

• Hypothecation is a charge created on movable assets
• Under Hypothecation, possession of the asset remain with the borrower
• Loan Period is smaller
• Loan amount is comparatively lesser
• The bank should verify that the party has a good reputation. It can check the property regularly. It can even ask the hypothecator to submit periodic report of the property
• There may be some incidents wherein the borrowers may cheat the banker by either partly selling goods hypothecated to the bank or not keeping the required stock of goods. Here, if bank finds that borrower is trying to mischief, it can insist upon or can convert hypothecation to pledge and takes over possession of the goods and keeps the same under its own custody

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What is Mortgage?

Definition: As per Section 58 of the Transfer of Property Act, 1882, Mortgage is the transfer of an interest in specific immovable property for the purpose of securing 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.

All about Mortgage

• Mortgage is a charge created on immovable assets
• Immovable Assets include land, building, or anything attached to earth
• The transferor is called a mortgagor
• The transferee a mortgagee
• The principal money and interest of which payment is secured for the time being is called the Mortgage Money
• The instrument (if any) by which the transfer is effected is called a Mortgage Deed
• Possession of the asset remain with the borrower
• Loan Period is longer
• Loan amount is comparatively higher

Essentials of Mortgage

• Transfer of Interest
• Specific Immovable Property
• To Secure the Payment of a Loan
• Return of interest of Property

Types of Mortgage

• Simple Mortgage
• English Mortgage
• Anomalous Mortgage
• Usufructuary Mortgage
• Mortgage by Conditional Sale
• Mortgage by deposit of title of deeds

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What is Assignment?

Assignment is an agreement between two parties wherein one party transfers some or all his ownership rights on a particular property owned by him to the other party. After Assignment, the property is transferred to the person receiving the property rights.

All about Assignment

• Assignment is an agreement between two parties
• The property owner transferring the ownership right is called Assignor
• The person receiving the property right is called Assignee
• Assignor can transfer the rights either partly or fully
• Assignment is irrevocable
• Assignment is used generally in case of insurance policy or annuity
• Assignment can either be made by endorsement on the insurance policy or by some separate instrument
• After Assignment, the property is transferred to the Assignee
• Assignee gets all the rights of the assigned item
• Assignee can deal with the assigned item in any manner as per his wish
• If the insured person dies, the insurance company pays the outstanding amount of debt of the insured person (assignor) to the assignee and then pays the rest of the amount to the beneficiaries of the insurance policy

Types of Assignment

• Absolute Assignment: In it, Assignor transfer all ownership rights to the Assignee
• Collateral Assignment: In it, Assignor transfers a part of his ownership rights to the assignee which is limited upto to outstanding loan value and the remaining ownership rights with the assignor (insured person)

Benefits of Assignment

• Assignor gets loan more easily
• Assignee is more secured in case of demise of the borrower or default by the borrower

Pledge Vs Hypothecation Vs Mortgage Vs Assignment

Find below major differences among Pledge, Hypothecation, Mortgage and Assignment:

Important Points to note

• Term "Mortgage" must only be used in connection with immovable assets.
• Terms "Pledge" and "Hypothecation" may generally be used in case of movable assets.
• Where a mortgage of movable is created by delivery of possession of goods, it is known as Pledge.
• Where a mortgage of movable is created without delivery of possession, it is called Hypothecation.
• Loans given under hypothecation are not so secured from point of view of lender's safety.

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