Definition - What does Hypothecation mean?

Hypothecation is the process granting a creditor rights to property or assets that a borrower still owns. The rights that a creditor gains are "hypothecs."

Borrowers benefit from hypothecation because they do not give up the ownership or benefits deriving from ownership of the asset that they pledge for collateral.

Justipedia explains Hypothecation

Hypothecation is better known by the more universally used terms "mortgage" or "lien."

Through hypothecation, a creditor gives a loan in exchange for a lien on an asset that the borrower offers. The borrower retains ownership of the asset. If the borrower fails in their obligations to the creditor, the creditor may invoke the hypothec and claim the asset that the borrower offered for the loan.

A classic illustration of hypothecation at work is a mortgage. With a mortgage, a borrower offers a house for collateral. The borrower owns the house, may live in the house, and enjoys benefits from the house, but if the borrower fails to make mortgage payments, the creditor may claim the house.

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