Pledge vs Hypothecation vs Lien vs Mortgage vs Assignment

The difference between pledge, hypothecation, lien, mortgage, and assignment lies in the security charge that
can be created on any asset held by a lender against the money lent (usually called the collateral). The type of
asset charge defines whether the agreement can be classified as a pledge, lien, or mortgage. Let us see in
detail the difference between pledge vs hypothecation vs lien vs mortgage vs assignment.

There are several types of security interests that can be adopted by banks or lenders depending upon the
collateral involved and the circumstances. Different forms of creating charges on assets are as follows:

Table of Contents
1. Pledge
2. Hypothecation
3. Lien
4. Mortgage
5. Assignment
6. Short Summary Table

Pledge
Pledge is commonly used for goods or securities such as gold, stocks, certificates, etc. The lender (pledgee)
holds the actual possession of such securities until the borrower (pledger) has the borrowed amount with him.
Once the borrowed amount has been returned, the securities are returned as well. If the pledger defaults on
the loan amount, the pledgee can sell off the goods pledged to him as security in order to recover the principal
and the interest amount. In this case risk of lending comparatively reduces because possession of assets is
with the lender.

Hypothecation
Hypothecation is usually when the charge is on movable assets rather than having a charge on fixed assets.
However, hypothecation is different from pledges in the sense that the possession of such movable security
stays with the borrower. Hence, in the event of default, the lender is first required to take possession / seize
such property or asset in order to recover the principal and interest. An example of hypothecation is vehicle
financing, where the lender has the asset that has been hypothecated against the loan with a bank. If the
borrower defaults, the bank then takes possession of the vehicle after sufficient notice to recover the money.

Lien

Under a lien, the lender gets the right to hold up a property or machinery used as collateral against funds
borrowed. However, unless the contract states otherwise, the lender doesn’t have the right to sell the
property or the asset if the borrower defaults on the loan. Examples of lien include rent receivable, unpaid
fees, etc. It is a right given to the creditor to retain/possess the security until the loan amount g. Since
possession is with the creditor, it is the strongest form of security. Lien can be on both movable and
immovable property. But generally, lending companies choose to have mortgages on immovable property and
lien on movable security like shares, gold, deposits, etc.
 Mortgage
Under a mortgage, the legal ownership of the asset can be transferred to the lender if the borrower defaults
on the loan amount. However, the borrower continues to remain in possession of the property. A mortgage is
usually used for immovable assets (example: house, land, building, or any property which is permanently fixed
to the earth or attached to the land). Home loans classify as mortgages.

Assignment
An assignment is another type of charge on current assets or fixed assets. Under assignment, the charge is
created on the assets held in the books. It is another mode of providing security against borrowing. Examples
of assignments include life insurance policies, books of debts, receivables, etc., which the bank can finance.
For example – A bank can finance against the book debts. The borrower assigns the book debts to the bank in
such a case.

Short Summary Table

To get an idea about the difference between pledge vs hypothecation vs lien vs mortgage vs assignment, refer
to the table below.

Basis Pledge Hypothecation Lien Mortgage Assignment

Goods or
securities such as Immovable Current assets or
Collateral Movable assets FD
gold, stocks, assets fixed assets
certificates, etc

Life insurance
Gold, stocks, Vehicle financing/ Loan on Fixed House, land,
Examples policies, NSC,KVP
certificates, etc. Machinery Loan Deposit building,
receivables, etc.