A lien is the right of a creditor in possession of goods, securities or any other assets belonging to the debtor to retain them until the debt is repaid, provided that there is no contract express or implied, to the contrary. 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. 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.
The distinctions between a lien, pledge, and hypothecation are the following:
- Lien is the right of a creditor to retain the properties belonging to the debtor until the debt due to him is unpaid.
- Lien gives a person only a right to retain the possession of the goods and not the power to sell them.
- It is applicable to both movable & immovable goods.
- It’s usually, used by the banks.
- Pledge is the bailment of goods as security for payment of a debt or performance of a promise.
- But pledge gives the right to sell the goods at specific causes/necessity.
- It is applicable to movable goods only.
- It’s usually used by the non-financial firms.
- The mortgage of movable property for securing the loan is called hypothecation.
- Hypothecation also gives the right to sell the goods at specific causes/necessity.
- It is applicable for only movable property.
- It’s usually used by financial institutions.
These are the basic distinctions of a lien, pledge, and hypothecation.