What is Hypothecation

Hypothecation is the practice where (usually through a letter of hypothecation) a debtor pledges collateral to secure a debt or as a condition precedent to the debt, or a third party pledges collateral for the debtor

Hypothecation happens once associate degree quality is pledged as collateral to secure a loan, while not leaving behind title, possession or possession rights, like financial gain generated by the quality. However, the loaner will seize the quality if the terms of the agreement aren’t met

Hypothecation happens most ordinarily in mortgage disposition. The receiver technically owns the house, however because the home is pledged as collateral, the mortgage loaner has the correct to seize the house if the receiver cannot meet the compensation terms of the loan agreement – that occurred throughout the proceeding crisis. automobile loans area unit equally secured by the underlying vehicle.

As hypothecation provides security to the loaner thanks to the collateral pledged by the receiver, it’s easier to secure a loan, and therefore the loaner might supply a lower rate than on associate degree unsecured loan.

Margin disposition in brokerage accounts is another common type of hypothecation. once associate degree capitalist chooses to shop for on margin or sell-short, they’re agreeing that those securities is sold if necessary if there’s a call. The capitalist owns the securities in their account, however the broker will sell them if they issue a call that the capitalist cannot meet, to hide the investors’ losses