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​Types of Loan v/s Charges on Loan

​Pledge

Lender - Pledgee

Borrower - Pledgor​

​Hypothecation

Charge on movable asset​

• ​creating a charge on the assets

Section 172 of the Contract Act defines pledge as "a bailment of goods for security for the payment of a debt or performance of a promise. The ownership remains with the Pledger, subject only to the qualified property which passes to the pledgee by virtue of the bailment to him". 

​PLEDGE

DEFINITION:​

Section 172 of the Contract Act defines pledge as "a bailment of goods for security for the payment of a debt or performance of a promise. The ownership remains with the Pledger, subject only to the qualified property which passes to the pledgee by virtue of the bailment to him". 

​PLEDGE

DEFINITION:​

​Hypothecation was not defined under Indian law for a long time and was used more on the basis of practice. However, now under the Securitization 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

DEFINITION:​

​Pledge v/s Hypothecation

​Pledge : ​

It is used when the lender (pledgee) takes actual Possession of assets.

​Loan will be given against the security of movable assets. 

In case of default by the borrower, the pledgee has a right to sell the goods in his possession and recover the money towards the due amount.

The common example for pledge is Jewellery/Gold

The assets are physically transferred as security to obtain a loan. 

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​Hypothecation 

​It is used for creating charge  against the security of movable assets, but here the possession of security remains with the borrower itself.

​Here also loan will be given against movable assets.

​In case of default by the borrower, the lender will have the right to first take possession of an asset and then sell the same to recover his amount. 

​The common example for hypothecation is car loan.

​The asset remains with the borrower. However, the right to sell' the asset will be transferred.

PROCEDURES OF PLEDGE/HYPOTHECATION: ​

• Creation

• Closure

• Invocation​