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Types of Charges over Securities in a Bank Loan

Published on Wednesday, November 05, 2014
When you hear the word ‘loan’, what come to mind? It’s difficult to get one, it is messy, it’s confusing – all those paper works, you need to keep your house as a security, then there’s paying of installments – and if you don’t pay they’ll take away the house!

Oh, yes – Loans are messy and complicated and more so when you need to study about them – and specially the types of charges.
I have always found it so confusing – which one is ‘hypothecation’? When do we ‘mortgage’? ‘What is a lien?!’

Today, Dear Readers, we are going to clear up the fog in these concepts and hopefully attempt to remember it for life … after all …everyone takes a loan these days!

When we are planning to avail a bank loan, our second thought, right after we’ve thought of taking a loan, will be – which asset should I provide as a security?


Security in banking terms and specifically in relation to a bank loan refers to any asset on which a charge is created by a bank in its favour; where any default occurs, i.e., the borrower (loan taker) is not able to pay the loan amount back, then this asset is the Bank’s refuge!

The Bank will utilize this asset on which it has a charge, in the manner(s) allowed by various laws, and recover its dues. Thus Bank’s interests (the loan amount and interest on the loan) are secured by creation of a charge on some assets which belong to the borrower – hence known as a security.

Kinds of Charges:

Type of Charge

Is created on

Such as

And the possession of the asset is with

I. Mortgage

Immovable Properties

(properties that do not move!)

Land and Building

Borrower…i.e., the one who has taken the loan.

II. Pledge

Movable goods or property

Share Certificates/NSC Certificates/Gold jewelley

Lender, i.e., the Bank = Pledgee

III. Hypothecation

Movable goods or property

Plant and Machinery/ Automobiles


Usually for car/vehicle loans…has anyone noticed that some autos have ‘Hypothecate to/with XYZ Bank, abc on xx/xx/xxxx’ painted
in small letters on the back.

IV. Lien

Paper security

Shares/Debentures/Mutual Funds/ Bonds

V. Personal Liability

Is nothing but personal guarantee

By 3rd parties

Like a guarantee

Also important to know:

(i) Fixed Charge is the kind of charge created on properties/assets the identity/nature/ownership of which does not change. For example, a fixed charge would be created on Land & Building, Plant & Machinery.

(ii) Floating Charge is created on assets which undergo change of ownership – like stocks of goods of a shop. A trading concern, like a saree shop, may take a loan, pledging its stock (all the sarees) as security.

Such a stock which is its trading stock maybe used for business, i.e., it can be sold in the ordinary course of its business. Thus the charge is on the stock, which keeps changing, because it is capable of being traded.

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