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| Corporate practice bd |
Mortgage, Pledge-and-Hyphenation with Examples
Mortgage:
A mortgage is a legal agreement where a borrower uses real property (such as a house or land) as collateral to secure a loan from a lender, typically a bank or a mortgage lender.
The borrower (mortgagor) agrees to repay the loan amount plus interest over a specified period, and in return, the lender (mortgagee) holds the property title as security until the loan is fully repaid.
If the borrower fails to repay the loan according to the terms of the mortgage agreement, the lender has the right to foreclose on the property, sell it, and use the proceeds to satisfy the debt.
Example of Mortgage:
Suppose you want to buy a house, but you don't have enough cash to pay for it outright. You approach a bank for a mortgage loan. The bank agrees to lend you the money, and in return, you agree to pledge your house as collateral. You sign a mortgage agreement stating that you'll repay the loan amount plus interest over, say, 30 years. Until you fully repay the loan, the bank holds the title to your house. If you default on your mortgage payments, the bank has the right to foreclose on the property and sell it to recover the outstanding debt.
Pledge:
Pledge is a type of security interest where a borrower (pledgor) offers a personal property (such as stocks, bonds, or valuable goods) as collateral to secure a loan or debt obligation.
Unlike a mortgage where real property is used as collateral, in a pledge, personal property is pledged to the lender as security.
If the borrower defaults on the loan, the lender (pledgee) has the right to take possession of the pledged property and sell it to recover the outstanding debt.
Example of Pledge:
Let's say you need a loan to finance your business expansion. You have valuable stocks in your investment portfolio. You pledge these stocks as collateral to secure a loan from a bank. The bank agrees to lend you the money, and in return, you pledge your stocks as security. If you fail to repay the loan as per the agreement, the bank has the right to seize and sell your stocks to recover the outstanding debt.
Hypothecation:
Hypothecation is a legal term used in financing where a borrower pledges assets (usually movable property like inventory, equipment, or accounts receivable) as collateral for a loan, without surrendering possession of the assets to the lender.
The borrower retains the right to use and control the pledged assets as long as they comply with the terms of the loan agreement.
If the borrower defaults on the loan, the lender has the right to seize and sell the pledged assets to recover the outstanding debt.
Example of Hypothecation:
Let's say you own a manufacturing company and need a loan to purchase new machinery. You pledge your existing machinery and equipment as collateral to secure a loan from a bank. However, you retain possession and control of the machinery and continue to use it in your business operations. If you default on the loan, the bank has the right to seize and sell the machinery to recover the outstanding debt, but until then, you can continue to use it.