Tuesday, February 10, 2015

Pledge, Hypothecation, Mortgage, Lien

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Securities for loan
If you want a loan from a bank (or any other financial institution), you generally need to provide some kind of security against the loan to the bank. There are several types of securities, against which a bank will offer you a loan -

  1. Pledge - It is used when the bank (or, lender, known as pledgee) takes actual possession of the securities, such as goods, certificatesgolds, etc, (you provide it to bank to avail loan) which are generally movable in nature. Bank keeps the securities with itself, and provide loan to you.
    Bank will return the securities (possession of goods) to you (borrower, known as pledgor), after you repay all the debts (i.e., loan) to the bank. In case you are unable to pay back, then the bank has the right to sell the assets, and recover the loan amount (with interest).

    Example - Gold loans, Jewellry loans, advances against NSC (National Saving Certificates), or loans against any other assets.
  2. Hypothecation - It is used when you (borrower) have the actual possession of the asset, for which you have taken the loan. Generally, this is charged against loans for movable assets, like car, bus, etc. (i.e., vehicle loans). Here, the assets (bus, car, etc.) remain with you, and you are hypothecated to the bank for the loan granted.
    In case you are unable to repay the loan amount, then the bank has the right to sell the asset (bus, car, etc.), (which is possessed by you) and recover the total amount (with interest).

    Example - Car loans, Bus loans, etc.
  3. Mortgage - It is used when you (borrower) have the actual possession of the assets, for which you are granted loan (e.g., house loan), or against which you are granted loan (e.g., house mortgaged). Mortgages are generally those assets, which are permanently attached with Earth surface, like house, land, factory etc.
    In case you are unable to repay the loan amount, the bank has the right to seize and sell the mortgage, and recover the loan amount (with interest).
  4. Lien - It is almost similar to Pledge, except that in case of lien, the lender can only detain the asset/goods until the borrower repays the loan, but have no right to sell the asset, unless explicitly declared in the lien contract. (For a pledge, the lender can sell the asset, if the borrower is unable to pay the loan)

Note the followings -
Movable assets - Pledge, Hypothecation, Lien
Immovable assets - Mortgage

Possessed by lender - Pledge, Lien
Possessed by borrower - Hypothecation, Mortgage

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