Pledge vs Hypothecation vs Mortgage
Same purpose, different rules. It all comes down to what the property is and who keeps it.
Pledge, hypothecation and mortgage are three ways to give a lender security for a loan. The difference comes down to two questions: what kind of property is it, and who keeps it while the loan runs?
Pledge and hypothecation are for movable property, such as gold, vehicles and goods. Mortgage is for immovable property, such as land and buildings. In a pledge the lender holds the goods; in hypothecation the borrower keeps using them.
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Pledge vs Hypothecation vs Mortgage at a Glance
Property
Pledge
Movable
Hypothecation
Movable
Mortgage
Immovable
Who has possession
Pledge
Lender
Hypothecation
Borrower
Mortgage
Usually the borrower
Law that defines it
Pledge
Indian Contract Act, s.172
Hypothecation
SARFAESI Act, s.2(1)(n)
Mortgage
Transfer of Property Act, s.58
Parties called
Pledge
Pawnor (borrower), pawnee (lender)
Hypothecation
Borrower, secured creditor
Mortgage
Mortgagor (borrower), mortgagee (lender)
Typical loan
Pledge
Gold loan, loan against goods in a godown
Hypothecation
Vehicle loan, cash credit against shop stock
Mortgage
Home loan, loan against property
Lender's first step on default
Pledge
Already holds the goods
Hypothecation
Must first get possession
Mortgage
Must enforce through law to sell
| Point | Pledge | Hypothecation | Mortgage |
|---|---|---|---|
| Property | Movable | Movable | Immovable |
| Who has possession | Lender | Borrower | Usually the borrower |
| Law that defines it | Indian Contract Act, s.172 | SARFAESI Act, s.2(1)(n) | Transfer of Property Act, s.58 |
| Parties called | Pawnor (borrower), pawnee (lender) | Borrower, secured creditor | Mortgagor (borrower), mortgagee (lender) |
| Typical loan | Gold loan, loan against goods in a godown | Vehicle loan, cash credit against shop stock | Home loan, loan against property |
| Lender's first step on default | Already holds the goods | Must first get possession | Must enforce through law to sell |
Pledge: The Lender Holds the Goods
A pledge is "the bailment of goods as security for payment of a debt". Bailment means handing goods to someone for a purpose, on the condition they come back. The borrower (pawnor) gives the goods; the lender (pawnee) keeps them until the loan is repaid.
If the borrower defaults, section 176 of the Indian Contract Act gives the lender two options: sue for the debt while keeping the goods, or sell the goods after giving the borrower reasonable notice. If the sale brings less than the dues, the borrower still owes the balance. If it brings more, the surplus must be paid back to the borrower.
Hypothecation: The Borrower Keeps Using It
Hypothecation is a charge on movable property created without handing it over. A borrower with a two-wheeler loan rides the bike every day; the bank only has a charge on it. For vehicles, the RTO records the hypothecation in the registration certificate (RC), and removes it once the loan is closed.
Hypothecation can also be a floating charge on things that keep changing, such as a shop's stock or a factory's raw material. Because the lender does not hold the asset, it must first obtain possession through a lawful process before it can sell. That is why vehicle recovery is so tightly regulated.
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The Six Kinds of Mortgage
Section 58 of the Transfer of Property Act names six kinds. Banks use the equitable mortgage most.
| Kind | What happens |
|---|---|
| Simple mortgage | No possession given. The borrower is personally liable, and the lender can have the property sold through court if the loan is not paid. |
| Mortgage by conditional sale | The borrower appears to sell the property, on condition the sale becomes absolute if the loan is not repaid by a date. |
| Usufructuary mortgage | The lender gets possession and keeps the rent or produce in place of interest or repayment. |
| English mortgage | The property is transferred absolutely to the lender, who must transfer it back when the loan is repaid. |
| Mortgage by deposit of title deeds (equitable mortgage) | The borrower deposits the property papers with the lender, intending to create security. Allowed only in Kolkata, Chennai, Mumbai and towns the State Government notifies. |
| Anomalous mortgage | Any mortgage that does not fit the five kinds above. |
What This Means in the Field
Hypothecation gives the bank a charge, not a licence to grab. An agent cannot simply pick up a hypothecated vehicle from the road. Possession must follow the lender's lawful process and RBI's conduct rules. With a pledge, the goods are already with the lender, so field recovery is rarely needed at all.
How the DRA Exam Tests This
Expect one-line identification: "Possession remains with the borrower in" (hypothecation), "Gold loans are usually secured by" (pledge), "Mortgage by deposit of title deeds is also called" (equitable mortgage). The common trap is choosing pledge for a vehicle loan because the vehicle is movable. Movable is right, but possession stays with the borrower, so it is hypothecation.
Another trap is the party names: pawnor and pawnee for pledge, mortgagor and mortgagee for mortgage. In both pairs, the "-or" is the borrower giving the security.
FAQs
What is the main difference between pledge and hypothecation?expand_more
Possession. In a pledge the lender keeps the goods, as in a gold loan. In hypothecation the borrower keeps and uses the goods, as with a car under a car loan, and the lender only has a charge on them.
Is a car loan a pledge or hypothecation?expand_more
Hypothecation. The car is movable, but you keep driving it. The bank's charge is recorded in the RC and removed when the loan is closed.
What is an equitable mortgage?expand_more
A mortgage by deposit of title deeds. The borrower hands the property documents to the lender with the intention of creating security. The Transfer of Property Act allows it in Kolkata, Chennai, Mumbai and towns notified by the State Government.
Can the bank sell pledged gold if I miss payments?expand_more
Under section 176 of the Indian Contract Act, a lender may sell pledged goods after giving the borrower reasonable notice. Any surplus after clearing the dues must be paid back to the borrower; any shortfall is still owed.
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