Multiple choice

Which of the following is incorrect in case of hypothecation?

  1. It is defined as per SARFAESI Act

  2. The ownership remains with the borrower

  3. The possession remains with the creditor

  4. The creditor has the right to demand possession
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Hypothecation is used for creating charge against the security of movable assets, but here the possession of the security remains with the borrower itself. Thus, in case of default by the borrower, the lender (to whom the goods/security has been hypothecated) will have to first take possession of the security and then sell the same. The best example of this type of arrangement is car loan. In this case, car/vehicle remains with the borrower but the same is hypothecated to the bank/financer. In case the borrower defaults, banks take possession of the vehicle after giving notice and then sell the same and credit the proceeds to the loan account.

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