Pledge vs Hypothecation vs Mortgage – Overview, and Differences

Pledge, hypothecation and mortgage are different ways of securing a loan against an asset.

• A pledge generally involves movable assets
• The lender takes possession of the pledged asset
• Hypothecation generally involves movable assets
• The borrower retains possession of a hypothecated asset
• A mortgage generally involves immovable property
• The borrower generally retains possession of mortgaged property

Understanding these differences can help borrowers identify how an asset is used as collateral and what rights the lender may have.

Pledge, hypothecation and mortgage are different forms of secured financing. The key difference lies in the type of asset used as collateral and who retains possession of it during the loan tenure. A pledge generally involves movable assets, hypothecation allows the borrower to retain possession of the secured asset, while a mortgage involves immovable property.

In simple terms, a pledge requires the lender to hold the asset, hypothecation allows the borrower to continue using the asset, and a mortgage secures the loan against property. The lender’s rights depend on the agreement and applicable laws.

A pledge is an arrangement in which a movable asset is given to the lender as security while ownership remains with the borrower. The lender takes possession of the asset until the loan or obligation is discharged.

Common examples include:

• Gold used as security for a gold loan
• Certain securities pledged as collateral
• Goods or other movable assets offered as security

The borrower continues to own the pledged asset, but the lender holds possession. If the borrower defaults, the lender may have the right to sell the pledged asset according to the applicable agreement and law.

Hypothecation is an arrangement where a borrower offers a movable asset as collateral while retaining possession and use of the asset. The lender receives a security interest in the asset without taking physical possession during the normal course of the loan.

Hypothecation is commonly associated with:

• Car loans
• Two-wheeler loans
• Machinery finance
• Certain business loans
• Financing against movable business assets

The borrower can generally continue using the asset while making repayments. If the borrower defaults, the lender may have rights to take possession of or sell the secured asset, subject to the loan agreement and applicable laws.

A mortgage is a legal arrangement in which immovable property is provided as security for a loan or other financial obligation. The borrower generally retains possession and use of the property while the lender receives rights over the property as security.

Examples include:

• Home loans
• Loan Against Property
• Certain property-backed business loans
• Other borrowing secured against eligible immovable property

A mortgage continues according to the terms of the relevant agreement until the secured obligation is discharged. In case of default, the lender may have rights to enforce the security in accordance with the agreement and applicable laws.

If you default, the lender may enforce its security rights over the collateral, subject to the loan agreement and applicable laws. The specific action depends on whether the asset has been pledged, hypothecated or mortgaged. For a pledge, the lender may have the right to sell the pledged asset. Under hypothecation, the lender may take possession of and sell the secured movable asset where permitted. For a mortgage, the lender may enforce its rights over the mortgaged property according to applicable law. Borrowers should therefore understand the security terms before taking a secured loan and maintain timely repayments.

Understanding the difference between pledge, hypothecation and mortgage can help you understand how collateral works, who retains possession and what rights the lender may have if repayment obligations are not met.