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Pledge vs. Hypothecation: Know the Difference

Shumaila Saeed
By Shumaila Saeed || Published on January 19, 2024
Pledge involves the actual delivery of an asset as security for a loan, while hypothecation is the pledge of an asset as collateral without transferring possession.
Pledge vs. Hypothecation

Key Differences

A pledge is a type of security interest where physical possession of the collateral, such as goods or valuables, is transferred to the lender. In hypothecation, the borrower retains possession of the collateral, typically used in situations involving property or large assets.
Shumaila Saeed
Shumaila Saeed
Jan 19, 2024
The concept of a pledge is often used in personal loans, where items of value are held by the lender until repayment. Hypothecation is more common in mortgage loans or financing of large assets where the borrower keeps using the asset.
Shumaila Saeed
Shumaila Saeed
Jan 19, 2024
In a pledge, the lender has the right to sell the collateral if the loan is not repaid. In hypothecation, the lender may only take possession and sell the collateral upon default of the borrower.
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Shumaila Saeed
Jan 19, 2024
Pledges are governed by principles that require actual delivery of the asset to the lender. Hypothecation agreements usually involve a legal or equitable charge, where the property remains legally owned by the borrower.
Shumaila Saeed
Shumaila Saeed
Jan 19, 2024
The risk in a pledge is mainly on the lender if the value of the collateral decreases. In hypothecation, the risk remains with the borrower, as they maintain ownership and use of the asset.
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Shumaila Saeed
Jan 19, 2024
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Comparison Chart

Possession

Collateral is physically transferred
Borrower retains possession
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Common Use

Personal loans, small assets
Mortgage loans, large assets
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Lender's Rights

Can sell collateral upon default
Can take possession and sell upon default
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Governing Principles

Requires delivery of asset
Involves legal or equitable charge
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Jan 19, 2024

Risk

Lender bears risk of collateral value
Borrower retains risk of the asset
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Pledge and Hypothecation Definitions

Pledge

Pledges are used in small, short-term loans.
The small business owner pledged his vintage guitar for a quick loan.
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Jan 07, 2024

Hypothecation

Hypothecation is the process of pledging assets as collateral without surrendering them.
He entered into a hypothecation agreement, using his property as collateral for the loan.
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Jan 07, 2024

Pledge

A solemn binding promise to do, give, or refrain from doing something
Signed a pledge never to reveal the secret.
A pledge of money to a charity.
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Hypothecation

Hypothecation creates a charge on an asset which remains with the borrower.
The truck was under hypothecation, yet it was still used for daily operations.
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Jan 07, 2024

Pledge

Something given or held as security to guarantee payment of a debt or fulfillment of an obligation.
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Jan 06, 2024
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Hypothecation

It's commonly used in securing mortgage loans.
Hypothecation allowed them to keep living in their home while it served as collateral.
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Jan 07, 2024

Pledge

The condition of something thus given or held
Put an article in pledge.
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Jan 06, 2024

Hypothecation

It involves a legal right for the lender to seize the asset upon default.
In case of default, the lender had the right to seize the hypothecated asset.
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Jan 07, 2024

Pledge

Delivery of goods or personal property as security for a debt or obligation
A loan requiring a pledge of property.
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Jan 06, 2024

Hypothecation

To pledge (property) as security or collateral without delivery of title or possession.
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Pledge

The contract or transaction stipulating or involving such delivery.
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Jan 06, 2024

Hypothecation

Usage Problem To hypothesize.
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Jan 06, 2024

Pledge

A token or sign
"fair pledges of a fruitful tree" (Robert Herrick).
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Jan 06, 2024

Hypothecation

The use of property, or an existing mortgage, as security for a loan, etc.
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Pledge

A person who has been accepted for membership in a fraternity or similar organization and has promised to join but has not yet been initiated.
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Hypothecation

(British) A tax levied for a specific expenditure.
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Jan 06, 2024

Pledge

A vow to abstain from alcoholic liquor
Ex-drinkers who have taken the pledge.
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Jan 06, 2024

Hypothecation

The act or contract by which property is hypothecated; a right which a creditor has in or to the property of his debtor, in virtue of which he may cause it to be sold and the price appropriated in payment of his debt. This is a right in the thing, or jus in re.
There are but few cases, if any, in our law, where an hypothecation, in the strict sense of the Roman law, exists; that is a pledge without possession by the pledgee.
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Shumaila Saeed
Jan 06, 2024

Pledge

(Archaic) The act of drinking in honor of someone; a toast.
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Jan 06, 2024

Hypothecation

A contract whereby, in consideration of money advanced for the necessities of the ship, the vessel, freight, or cargo is made liable for its repayment, provided the ship arrives in safety. It is usually effected by a bottomry bond. See Bottomry.
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Pledge

To offer or guarantee by a solemn binding promise
Pledge loyalty to a nation.
Pledge that the duties of the office will be fulfilled.
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Hypothecation

Hypothecation is typical in large-scale financing.
Hypothecation was used to secure the financing for the new factory.
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Shumaila Saeed
Jan 07, 2024

Pledge

To bind or secure by a pledge or promise
Pledged themselves to the cause.
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Jan 06, 2024

Pledge

To deposit as security; pawn.
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Jan 06, 2024

Pledge

To promise to join (a fraternity or similar organization).
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Pledge

To accept as a prospective member of such an organization.
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Pledge

(Archaic) To drink a toast to.
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Jan 06, 2024

Pledge

To make a solemn binding promise; swear.
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Pledge

(Archaic) To drink a toast.
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Jan 06, 2024

Pledge

To make a solemn promise (to do something).
Pledge allegiance to the flag
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Pledge

To deposit something as a security; to pawn.
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Pledge

(transitive) To give assurance of friendship by the act of drinking; to drink to one's health.
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Jan 06, 2024

Pledge

A solemn promise to do something.
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Pledge

A promise to abstain from drinking alcohol.
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Pledge

An asset or person temporarily handed over to guarantee the fulfilment of something promised, under threat of permanent loss of the thing handed over; surety, security, hostage.
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Jan 06, 2024

Pledge

(law) A bailment of personal property to secure payment of a debt without transfer of title.
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Jan 06, 2024

Pledge

The personal property so pledged, to be kept until the debt is paid.
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Jan 06, 2024

Pledge

(college slang) A person who has taken a pledge of allegiance to a college fraternity, but is not yet formally approved.
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Pledge

A drinking toast.
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Pledge

The transfer of possession of personal property from a debtor to a creditor as security for a debt or engagement; also, the contract created between the debtor and creditor by a thing being so delivered or deposited, forming a species of bailment; also, that which is so delivered or deposited; something put in pawn.
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Shumaila Saeed
Jan 06, 2024

Pledge

A person who undertook, or became responsible, for another; a bail; a surety; a hostage.
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Jan 06, 2024

Pledge

A hypothecation without transfer of possession.
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Jan 06, 2024

Pledge

Anything given or considered as a security for the performance of an act; a guarantee; as, mutual interest is the best pledge for the performance of treaties.
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Pledge

A promise or agreement by which one binds one's self to do, or to refrain from doing, something; especially, a solemn promise in writing to refrain from using intoxicating liquors or the like; as, to sign the pledge; the mayor had made no pledges.
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Jan 06, 2024

Pledge

A sentiment to which assent is given by drinking one's health; a toast; a health.
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Jan 06, 2024

Pledge

To deposit, as a chattel, in pledge or pawn; to leave in possession of another as security; as, to pledge one's watch.
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Pledge

To give or pass as a security; to guarantee; to engage; to plight; as, to pledge one's word and honor.
We mutually pledge to each other our lives, our fortunes, and our sacred honor.
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Pledge

To secure performance of, as by a pledge.
To pledge my vow, I give my hand.
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Pledge

To bind or engage by promise or declaration; to engage solemnly; as, to pledge one's self.
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Pledge

To invite another to drink, by drinking of the cup first, and then handing it to him, as a pledge of good will; hence, to drink the health of; to toast.
Pledge me, my friend, and drink till thou be'st wise.
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Jan 06, 2024

Pledge

A deposit of personal property as security for a debt;
His saxophone was in pledge
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Jan 06, 2024

Pledge

Someone accepted for membership but not yet fully admitted to the group
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Pledge

A drink in honor of or to the health of a person or event
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Jan 06, 2024

Pledge

A binding commitment to do or give or refrain from something;
An assurance of help when needed
Signed a pledge never to reveal the secret
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Jan 06, 2024

Pledge

Promise solemnly and formally;
I pledge that will honor my wife
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Jan 06, 2024

Pledge

Pay (an amount of money) as a contribution to a charity or service, especially at regular intervals;
I pledged $10 a month to my favorite radio station
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Shumaila Saeed
Jan 06, 2024

Pledge

Propose a toast to;
Let us toast the birthday girl!
Let's drink to the New Year
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Jan 06, 2024

Pledge

Give as a guarantee;
I pledge my honor
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Jan 06, 2024

Pledge

Bind or secure by a pledge;
I was pledged to silence
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Shumaila Saeed
Jan 06, 2024

Pledge

A pledge is a bailment of goods as security for a debt.
He gave his watch as a pledge for the loan.
Shumaila Saeed
Shumaila Saeed
Jan 07, 2024

Pledge

It involves the physical transfer of an asset to the lender.
The family jewels were pledged to secure the needed funds.
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Jan 07, 2024

Pledge

A pledge is a contractual promise to repay a debt.
She signed a pledge to repay the borrowed money in six months.
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Pledge

It is a traditional form of security in lending.
The pawnshop accepted various items as a pledge for cash loans.
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Jan 07, 2024

Repeatedly Asked Queries

What is a pledge?

A pledge is a bailment of personal property as security for a debt or obligation.
Shumaila Saeed
Shumaila Saeed
Jan 19, 2024

What does hypothecation mean?

Hypothecation is pledging an asset as collateral for a loan without giving up possession.
Shumaila Saeed
Shumaila Saeed
Jan 19, 2024

Can pledged items be used by the borrower?

No, once pledged, the items cannot be used by the borrower.
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Jan 19, 2024

What happens to a pledged asset upon loan repayment?

It is returned to the borrower once the loan is repaid.
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Shumaila Saeed
Jan 19, 2024

Is hypothecation used in vehicle loans?

Yes, it's commonly used in vehicle financing.
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Shumaila Saeed
Jan 19, 2024

Are pledges legally binding?

Yes, pledges are legally binding agreements.
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Shumaila Saeed
Jan 19, 2024

Is hypothecation applicable to intangible assets?

Yes, it can be used for both tangible and intangible assets.
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Jan 19, 2024

When is a pledge used?

Pledges are often used in personal or short-term loans.
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Jan 19, 2024

Who holds the pledged asset?

In a pledge, the lender holds the physical asset.
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Jan 19, 2024

Can a hypothecated asset be seized?

Yes, upon default, the lender can seize the hypothecated asset.
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Shumaila Saeed
Jan 19, 2024

What kind of loans typically use hypothecation?

Mortgage loans and large asset financing commonly use hypothecation.
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Shumaila Saeed
Jan 19, 2024

Who retains possession in hypothecation?

The borrower retains possession in hypothecation.
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Jan 19, 2024

Who bears the risk in hypothecation?

The borrower bears the risk as they retain ownership.
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Shumaila Saeed
Jan 19, 2024

Can hypothecation be used for small loans?

It's typically used for larger loans due to its complexity.
Shumaila Saeed
Shumaila Saeed
Jan 19, 2024

What risk does the lender face in a pledge?

The risk of the pledged asset losing value.
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Jan 19, 2024

What is a hypothecation agreement?

It's a contract where a borrower pledges an asset as security without handing over possession.
Shumaila Saeed
Shumaila Saeed
Jan 19, 2024

What kind of assets can be pledged?

Valuables like jewelry, vehicles, or electronics can be pledged.
Shumaila Saeed
Shumaila Saeed
Jan 19, 2024

Is a pledge suitable for long-term loans?

Pledges are more suited for short-term lending.
Shumaila Saeed
Shumaila Saeed
Jan 19, 2024

Can a pledged asset be sold by the lender?

Yes, if the loan is not repaid, the lender can sell the asset.
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Shumaila Saeed
Jan 19, 2024

Can hypothecated assets be replaced or substituted?

It depends on the terms of the hypothecation agreement.
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Jan 19, 2024

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About Author
Shumaila Saeed
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Shumaila Saeed
Shumaila Saeed, an expert content creator with 6 years of experience, specializes in distilling complex topics into easily digestible comparisons, shining a light on the nuances that both inform and educate readers with clarity and accuracy.

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