Pledge and hypothecation are methods of providing collateral to secure a loan or debt. I just took a loan to buy a property and came to know about these terms. The primary difference between the two is the type of collateral used. Scroll down if you want to know the difference between pledge and hypothecation.
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What is the difference between pledge and hypothecation?
A pledge is the act of depositing an asset with a lender as collateral for a loan amount. Until the borrower repays the loan, the pledged asset is transferred to the lender. However, hypothecation uses a non-physical asset as collateral for a loan, such as securities or other financial assets.
Hypothecation vs Pledge| Factors | Pledge | Hypothecation |
|---|---|---|
Objective |
The security for a loan is an objective of pledge. |
The objective of hypothecation is to safeguard a debt or commitment. |
Owned By |
Borrower |
Creditor |
Possession |
The borrower provides physical possession of an asset. |
Here, the lender has the right to take possession. |
Risk |
Borrower is responsible for bearing the loss. |
Here, the lender bears the risk of loss. |
Registrable Charge |
Yes |
No |
Sale |
No sale of pledged property is permitted without the lender's approval. |
The lender may sell hypothecated property to take back the debt. |
Liquidation Priority |
High |
Low |
Asset Type |
Tangible assets like stock or equipment are pledged. |
Intangible assets like accounts receivable or intellectual property are frequently subject to hypothecation. |
Example |
If you pledge your car as collateral, the lender will keep it until the loan has been completely repaid. You may continue to use your car during this period as long as you make regular loan payments. |
If you hypothecate your stocks as collateral, the lender can sell these assets to recover their money. |
I hope you understood the difference between pledge and hypothecation. If you have any more questions on the matter, just drop them in the comments below.
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What is the difference between pledge and hypothecation?
Mausam
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2023-05-30T20:55:06+00:00 2023-05-31T12:58:21+00:00Comment
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