Land and immovable property can be used as a means of securing debts, also, by time it has been legally developed to take personal property for the same purpose of securing debts. Mortgage of personal property, sometimes called “commercial mortgage”. Mortgage of immovable property or mortgage of movable property, both ways, are essential for banks and lending entities. Such security gives a relief and comfort.
There are two main ways wherein personal property can be used as collateral to secure debts. The 1st option, is by “mortgage”, wherein the person who borrows the money retains the assets, such as equipment, furniture, goods or other items, but transfers their ownership to the lender to secure the loan borrowed for him or his company.
However, this could raise some problems as the borrower keeps the asset in his hand. Those who do business with him on credit, may be misled as to his creditworthiness. In such instances, the assets displayed could be owned by another lender and not by the borrower who has them. To stop such dealings and to give credibility to the security, special arrangement is required to register mortgaged items in a special entity. The registration must be re-checked within fixed certain years, if they are still in operation. Such register shall be open to public examination and therefore those who do business with the borrower can find all necessary info regarding the mortgaged goods.
I do remember, there was a famous case wherein a bank gives big loan on commercial mortgage of gold billions in a store under the hands of the borrower. Nobody checks and when he fails to pay the loan they discovered that the store was fully empty and the borrower became a famous invisible man. The 2nd option, is “pledge or pawn”. The distinction between the two options, is that in a pledge or pawn the lender takes possession of the assets which are to be used to secure his loan, even though the borrower retains the ownership. Therefore, in this option, there is less danger that the borrower will play with the items or obtain other credits because the assets will not be with him but with the lender until the loan is repaid. The security here is stronger and more secured, as possession with the lender. However, in all options, vigilance is imminent and becomes the top priority option.