Define Pledge and Hypothecation
Pledge and Hypothecation terms are used for creating a charge on the assets which is given by the borrower to the lender as a security for any loan. Charge means the asset is given as security, against a debt.
A pledge is a bailment that conveys possessory title to property owned by a debtor (the pledgor) to a creditor (the pledgee) to secure repayment for some debtor obligation and to the mutual benefit of both parties. The term is also used to denote the property which constitutes the security. A pledge is a type of security interest. Some examples of the pledge are Gold /Jewellery Loans, Advance against goods,/stock, Advances against National Saving Certificates etc.
In the pledge, the possession of the asset is transferred, but in the case of hypothecation, possession lies with the debtor only.
Hypothecation is the established practice of a borrower pledging an asset as collateral for a loan while retaining ownership of the assets and enjoying the benefits therefrom. With hypothecation, the lender has the right to seize the asset if the borrower cannot service the loan as stipulated by the terms in the loan agreement. Hypothecation also refers to securities in a margin account that an investor uses as collateral to borrow funds from a brokerage. It is used for creating a charge against the security of movable assets, but here the possession of the security remains with the borrower itself. The common example for hypothecation is car loans, in this type of loans, it remains with the borrower but the similar is hypothecated to the bank or financer.