Hypothecation

Hypothecation is a financial arrangement where a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral but gives the lender a right to take possession of it in the event of default. Common in loans such as mortgages, hypothecation allows borrowers to obtain financing based on the value of the collateral, rather than solely on their credit standing.

This process does not transfer title, but it does give the lender a lien, or a legal claim, against the asset. If the borrower fulfils the terms of the loan agreement, the lien is lifted, and the borrower's full ownership rights are restored. However, if the borrower defaults, the lender may enforce the lien to recover the outstanding loan amount by taking possession of and selling the collateral. Hypothecation thus plays a crucial role in reducing the risk of the loan for the lender, while enabling the borrower to make use of assets without selling them outright.