Understanding the Differences Between Mortgage, Hypothecation, Pledge, Assignment and Lien
When it comes to borrowing money to finance a large purchase, such as a home, or an automobile like a car, there are several terms that are used to describe the various ways in which the loan can be secured. The terms include mortgage, hypothecation, pledge, assignment, and lien.
While all of these terms involve using some form of collateral to secure a loan, they have different meanings and implications. Understanding the differences between these terms can help you to understand the lending process and the underlysing asset.
A mortgage is a common type of loan that is used to purchase fixed assets like real estate. In a mortgage agreement, the borrower agrees to pledge the property as collateral for the loan. This means that if the borrower defaults on the loan repayments, the lender (Bank or NBFC) has the right to foreclose on the property and take ownership of it.
Hypothecation is similar to a mortgage, but it is used to secure a loan for movable assets, like a car or a motorbike. In a hypothecation agreement, the borrower pledges the asset as collateral for the loan, but they retain ownership of the asset. If the borrower fails to make their loan payments, the lender has the right to seize the asset and sell it to minimise the losses.
A pledge is a type of loan agreement in which the borrower pledges an asset, such as a piece of jewelry or a stock certificate, as collateral for the loan. In a pledge agreement, the borrower retains ownership of the pledged asset, but the lender (Bank or NBFC) has the right to take possession of the asset if the borrower defaults on the loan repayments.
An assignment is a legal agreement in which the borrower assigns ownership of a specific asset, such as a life insurance policy or a pension plan, to the lender (Bank or NBFC) as collateral for the loan. In an assignment agreement, the borrower no longer has ownership of the assigned asset, and the lender has the right to take possession of the asset if the borrower defaults on the loan repayments.
Finally, a lien is a type of loan agreement in which the borrower agrees to give the lender a lien, or legal claim, on a specific asset as collateral for the loan. In a lien agreement, the borrower retains ownership of the asset, but the lender has the right to take possession of the asset if the borrower defaults on loan repayments.
In conclusion, mortgage, hypothecation, pledge, assignment, and lien are all ways in which borrowers can secure a loan by using some form of collateral. Each of these agreements has different implications for the borrower and the lender (Bank or NBFC), and it is important to understand the differences in order to ensure that the corrrect loan agreement is drawn up.