Hypothecation

Hypothecation is a legal mechanism by which a borrower offers an asset as security for a loan without giving ownership or possession of the asset to the lender. The borrower retains title and typically continues to use the asset, while the lender holds a security interest that can be invoked if the borrower defaults. Hypothecation is common in secured lending and is often used with movable property, such as inventory or equipment, and with financial assets like accounts receivable or shares.

A hypothecation is created by a contractual agreement and may be perfected by filing a notice with a public registry or through other means dictated by the applicable law and asset type. Upon default, the lender may enforce its security interest by seizing or selling the collateral, with proceeds applied to the debt. The remedies, scope, and enforcement procedures are defined by contract and relevant secured transaction statutes or regulations.

Hypothecation differs from a pledge, in which possession of the asset is transferred to the creditor, and from a mortgage, which involves real property and typically gives the lender a lien while the owner retains possession. In civil-law systems, hypothecation can be a general term for security arrangements, with mortgages, pledges, and charges having specific statutory definitions within those regimes.