Hypothecation

AAA

DEFINITION of 'Hypothecation'

The established practice of a borrower pledging an asset as collateral for a loan, while retaining ownership of the assets and enjoying the benefits therefrom. With hypothecation, the lender has the right to seize the asset if the borrower cannot service the loan as stipulated by the terms in the loan agreement. Hypothecation also refers to securities in a margin account that an investor uses as collateral to borrow funds from a brokerage.

INVESTOPEDIA EXPLAINS 'Hypothecation'

Since the practice of hypothecation provides security to the lender because of the collateral pledged by the borrower, the lender generally offers the loan at a lower rate of interest than on an unsecured loan.

Mortgages and margin loans are the most common examples of hypothecation. While it enables the borrower to obtain loans on more favorable terms than unsecured loans, the borrower risks losing the asset if prices plunge precipitously and the loan cannot be serviced. For example, a record number of U.S. homeowners lost their homes to foreclosure in the wake of the 2006-08 housing collapse and financial crisis, as home prices plunged and interest rates on mortgages rose.

RELATED TERMS
  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Collateral

    Property or other assets that a borrower offers a lender to secure ...
  3. Loan

    The act of giving money, property or other material goods to ...
  4. Pledged Asset

    An asset that is transferred to a lender for the purpose of securing ...
  5. Rehypothecation

    The practice by banks and brokers of using, for their own purposes, ...
  6. Business Broker

    A professional who specializes in the purchase and sale of companies. ...
Related Articles
  1. Mortgages: How Much Can You Afford?
    Budgeting

    Mortgages: How Much Can You Afford?

  2. When (And When Not) To Refinance Your ...
    Home & Auto

    When (And When Not) To Refinance Your ...

  3. Top 7 Most Common Financial Mistakes
    Options & Futures

    Top 7 Most Common Financial Mistakes

  4. 10 Steps To Tax Preparation
    Taxes

    10 Steps To Tax Preparation

comments powered by Disqus
Hot Definitions
  1. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  2. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  5. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  6. Budget Deficit

    A status of financial health in which expenditures exceed revenue. The term "budget deficit" is most commonly used to refer ...
Trading Center