- Secured Loan” means Loan which is secured by way of an asset of value equal or greater than amount of loan. When a borrower makes default in repayment of loan, the lender can sell that asset and use the proceeds to setoff outstanding of loan. When an asset is given as collateral for securing the debt, it is called “Creation of Charge”.
- There are various forms of creation of charge. The most commonly used form of creation of charge are Pledge, Hypothecation and Mortgage. Although these terms are used interchangeably many times, there is different meaning attached to these words. The difference and usage of these terms have been carved out in below table
| Point of Difference | Pledge | Hypothecation | Mortgage |
|---|---|---|---|
| Meaning | Pledge means bailment of goods as security against the loan. | Hypothecation is creation of charge on movable property without delivering them to the lender. | It is transfer of an interest in specific immovable property as security against loan. |
| Type of Security / Property | Movable (Gold, Jewellery, Stock, NSC etc. | Movable (Vehicles, Stock and debtors.) | Immovable (example: house, land, building or any property which is permanently fixed to the earth or attached to the land) |
| Possession of the security / Property | Remains with lender. | Remains with Borrower. | Remains with Borrower. |
| Examples of Loan | Gold Loan, Advance against NSCs, Advances against goods (also given under hypothecation) | Vehicle Loans, Advances against stock and debtors | Housing Loans |
| Parties | Pledgor and Pledgee | Hypothecator and Hypothecatee | Mortgagor and Mortgagee |
| Remedy for default by borrower | Lender can sell the asset to recover debt amount. | Since lender does not have physical possession, he can file a suit to take possession and dispose it off to recover debt amount. | Mortgagee can file a suit in court to take possession of mortgaged property and sell it to recover debt amount. |
| Legal definition | Section 172 of the Indian Contract Act defines pledge as “The bailment of goods as a security for the payment of a debt or performance of a promise”. | Section 2 (n) of Secruitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFESI) 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” | Section 58 of the Transfer of Property Act 1882 defines mortgage as “the transfer of an interest in specific immovable property for the purpose of securing payment of money advanced by way of loan”. |
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Written By: CA Bhavana Rathi
