Charges, mortgages, and pledges are quite similar to one another in that they are all security interests that banks use to provider lender with security over the borrower’s assets. There are, however, a few differences between them in terms of the ownership of the asset when loans are taken out and the various properties of the assets that are being offered to secure payment. The article offers a clear explanation on all 3 terms and shows the similarities and differences between the two.
Charge
There are two types of charges; fixed charges and floating charges. A fixed charge refers to a loan or mortgage of some kind that uses a fixed asset as collateral to secure loan repayment. Fixed assets that can be used as collateral in a fixed charge include land, machinery, buildings, shares, and intellectual property (patents, trademarks, copyrights, etc.). In the event that the borrower defaults on his loan, the bank can sell the fixed asset and recover their losses. The borrower/debtor cannot dispose the asset and the asset must be held by the borrower until the total loan repayment is made. A floating charge refers to a loan or mortgage on an asset that has a value that changes periodically to secure loan repayment. In this case, assets that do not have a constant value, or are not fixed assets such as stock inventory can be used.
In a floating charge, the borrower has the freedom to dispose of the asset (for example, sell stock) in the course of normal business activities. In the event that the borrower defaults on their loan, the floating charge freezes and becomes a fixed charge, and the inventory left over from the time of default cannot be disposed and will be used as a fixed charge to recover the outstanding debt.
Mortgage
A mortgage is a contract between the lender and the borrower that allows an individual to borrow money from a lender for the purchase of housing. Mortgages apply for property that is immovable such as buildings, land, and anything that is permanently attached to the ground (this means that crops are not included in this category). A mortgage is also an assurance to the lender which promises that the lender can recover the loan amount even if the borrower defaults. The home that is being purchased is offered as security for the loan; which, in the event of default, will be seized and sold by the lender who will use sales proceeds to recover the loan amount. The possession of the property remains with the borrowers (as they will usually reside in their home).
Pledge
A pledge is a contract between the borrower (or party/individual that owes funds or services) and lender (party or entity to which the funds or services are owed) in which the borrower offers an asset (pledges an asset) as a security to the lender. In a pledge, the assets will have to be delivered by the pledger (borrower) to the pledgee (lender). The lender will have limited interest with regard to the pledged asset. However, the possession of the pledged asset will give the lender legal title to the asset and the lender has the right to sell the asset in the event that the borrower is unable to meet his obligation.
What are the differences between Charge, Mortgage and Pledge?
Charges, mortgages, and pledges are all security interests that banks use to provide a lender with security over the borrower’s assets. A mortgage is different from a pledge in terms of asset ownership; in a mortgage the assets remain the property of the borrower, whereas in a pledge the assets will be delivered to the lender (lender will have legal title to the assets). Charges and mortgages are quite similar to one another; especially, the fixed charge where fixed assets are offered as collateral to secure loan repayment. Floating charges, on the other hand, refers to a loan or mortgage on an asset that has a value that changes periodically to secure loan repayment. Another difference is that, in a fixed charge, the assets need to be maintained until the debt is repaid. In a floating charge, the borrower has the freedom to dispose of the asset (for example, sell stock) in the course of normal business activities; however, if the borrower defaults on the loan, the floating charge will freeze and will be treated like a fixed charge until debts are recovered.
Summary:
Charge vs Mortgage vs Pledge
• Charges, mortgages, and pledges are quite similar to one another in that they are all security interests that banks use to provide a lender with security over the borrower’s assets.
• There are two types of charges; fixed charges and floating charges.
• A fixed charge refers to a loan or mortgage of some kind that uses a fixed asset as collateral to secure loan repayment and the borrower needs to maintain the assets until the debt is repaid and cannot dispose the asset until the total loan repayment is made. In the event that the borrower defaults on his loan, the bank can sell the fixed asset and recover their losses.
• In a floating charge, the borrower has the freedom to dispose of the asset in the course of normal business activities and, in the event that the borrower defaults on their loan, the floating charge freezes and becomes a fixed charge.
• A mortgage is a contract between the lender and the borrower that allows an individual to borrow money from a lender for the purchase of housing. The mortgages apply for immovable properties and possession of the property remains with the borrower. In the event of default, the lender will seize and sell the property and use sales proceeds to recover the loan amount.
• A pledge is a contract between the borrower and lender in which the borrower offers an asset (pledges an asset) as a security to the lender. The pledger (borrower) will have to deliver the assets to the pledgee (lender) and the lender will have legal title to the assets, and the lender has the right to sell the asset in the event that the borrower is unable to meet his obligation.
• In a mortgage, the assets remain the property of the borrower whereas, in a pledge, the assets will be delivered to the lender, who will have legal title to the assets.