What is the Difference Between Pledge and Hypothecation?

The main difference between pledge and hypothecation lies in the collateralization methods and the possession of the asset. Here are the key differences between the two:

Pledge:

• A pledge involves the physical transfer of an asset to the lender as security for a loan.
• The borrower transfers the possession of the asset to the lender until the loan is repaid.
• Examples of loans secured by a pledge include gold loans, advances against National Savings Certificates (NSCs), and advances against goods.

Hypothecation:

• In hypothecation, the borrower uses an asset as collateral without transferring its possession or title to the lender.
• The borrower retains possession and use of the asset, while the lender has a right to the asset in the event of default.
• Examples of loans secured by hypothecation include vehicle loans and advances against stocks and debtors.

Both pledge and hypothecation are methods of providing collateral to secure a loan or debt. The choice between pledge and hypothecation depends on various factors such as the nature of the asset, the terms of the loan, and the borrower's preferences.

Comparative Table: Pledge vs Hypothecation

The main difference between pledge and hypothecation lies in the possession and transfer of the asset used as security for a loan. Here is a table summarizing the key differences between pledge and hypothecation:

In a pledge, the borrower physically transfers the asset to the lender as security for the loan, while in hypothecation, the borrower retains possession and use of the asset, but the lender has a right to the asset in the event of default.