Hypothecation, Pledge and Hire-Purchase
There are various forms of financing through which we can acquire ownership of an asset. The following are some of the common forms.
Hypothecation
Under this, the borrower has the economic risks and rewards of owning the asset; has the physical possession of the asset and the legal title. The lender has only charge on the asset. An example of hypothecation is working capital finance, many consumer durable loans and some vehicle loans.
Pledge
In a pledge, the borrower has the economic risks and rewards of owning the asset and has the legal title to the asset. The lender has the physical possession of the asset as a collateral to the money being lend. An example of pledge is investment in stocks, bonds and gold with borrowed money. The 'loans against gold' schemes are pledge agreements.
Hire-Purchase
In a hire-purchase, the borrower has the economic risks and rewards of owning the asset and has physical possession. The lender has the legal right to the asset. In fact, the lender has bought the asset in his name and handed it over to the borrower for use. The borrower has the right to purchase the asset from the lender at the book value after the full repayment. Many vehicle loans, some consumer durable loans and capital asset financing agreements are hire-purchase agreements.
| Features |
Hypothecation |
Pledge |
Hire-Purchase |
| Has the borrower made full payment? |
No |
No |
No |
| Does the borrower has economic ownership? |
Yes |
Yes |
Yes |
| Does the borrower has physical possession? |
Yes |
No |
Yes |
| Does the borrower has legal title? |
Yes |
Yes |
No |
END OF MY NOTES