Question
When a borrower creates a charge over movable assets
(present or future) in favor of a lender, but retains possession of those assets, such a security arrangement is termed as:Solution
• Hypothecation refers to a charge on movable property (like inventory, vehicles, or receivables) given as security for a loan, without transferring possession to the lender. The borrower continues to use the asset, but the lender has a legal right over it in case of default. • Pledge involves movable assets too, but here possession is transferred to the lender (e.g., gold loan). • Mortgage deals with immovable property such as land or buildings. • Lien gives the creditor the right to retain goods until dues are cleared. • Assignment involves transferring rights or receivables to another party. Thus, the correct term in this case is Hypothecation.
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