Are you wondering what is the difference between charge, pledge and mortgage? These terms might sound perplexing because they involve security interests.
Generally, the main distinctions between these three security interests are:
- The kind of property involved
- The transfer of ownership or possession
- The legal rights granted to the lender
Charge: A Wider Security Interest
A charge is a security interest established over an immovable or mobile asset without giving up ownership or possession. The parties’ actions or the operation of the law can prove it.
Unlike a mortgage, a charge does not include the transfer of property interest. However, it allows the lender to seize the asset to collect the loan in the event that the borrower fails.
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Pledge: Security of Movable Assets
A pledge is the bailment of commodities as collateral for fulfilling a commitment or paying back a debt. Under this arrangement, the lender (pledgee) receives moveable assets from the borrower (pledgor), such as:
- Gold
- Securities
- Goods
If the borrower defaults, the pledgee can sell the item, but the pledgor retains ownership.
Mortgage: Security of Immovable Property
In a mortgage, a specified immovable property, such as a building or piece of land, is transferred as security for a loan. Lenders get a legal stake in the property, while the borrower (mortgagor) keeps possession.
In the event of a borrower default, the mortgagee may take legal action to sell the property and recoup the loan.
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What is the Difference Between Charge, Pledge and Mortgage?
| Feature | Charge | Pledge | Mortgage |
| Asset type | Movable or Immovable | Moveable | Immovable |
| Possession | Retained by borrower | Transferred to lender | Retained by borrower |
| Ownership | Retained by borrower | Retained by borrower | Interest transferred to lender |
| Legal rights | Right to claim asset upon default | Right to sell asset upon default | Right to sell via legal process |
| Creation | By contract or operation of law | By contract | By contract and registration |
The Bottom Line
Making wise financial and legal decisions requires understanding what is the difference between charge, pledge and mortgage. The nature of the asset, the transfer of possession or ownership, and the legal rights involved vary across the three, even though they are all methods to protect a lender’s interest. A charge is a more general term that can apply to both movable and immovable assets without transferring possession or ownership. A pledge covers moveable assets with possession transferred to the lender. Mortgage relates to immovable property with an interest transferred.
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