Distinguish between Pledge & Hypothecation, and Hypothecation & Mortgage.
Pledge and Hypothecation:
Pledge is a bailment of goods as security for payment of a debt or performance of a promise whereas hypothecation is a mode that helps in creating charge on goods or related documents without surrendering the possession of goods.
In case of pledge, possession over pledged goods is only given and not the ownership. Borrower keeps the ownership with him. On the other hand, hypothecation creates an equal change on goods for the debt amount but borrower keeps the possession of the hypothecated goods.
In case of pledge, there is no scope for fraud. Pledging method is simple and popular as it helps in securing a charge on the property whereas hypothecation involves scope for fraud because goods that are hypothecated remain in the custody of the borrower.
Hypothecation and Mortgage:
Hypothecation is said to be a legal transaction where goods may be made available as security for a debt without transferring either property or possession to lender whereas mortgage means the transfer of interest in a specific immovable property by one person to another in order to secure an advance of money.
Hypothecation is a risky method that involves scope for fraud because borrower keeps the hypothecated goods in his possession or custody. whereas mortgage is not a risky method and no scope for fraud is involved in this method.
Hypothecated goods are not required to be insured whereas certain goods, in case of mortgage method, should be insured against fire, riot etc. For example—buildings, or any other property.