Hypothecation

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Hypothecation

Meaning:

Hypothecation is defined as a financing arrangement in which a borrower pledges movable assets, such as vehicles or machinery, as collateral for a loan while retaining ownership. The lender has the right to seize the asset if the borrower fails to repay the loan.

Example:

For instance, when an individual takes a loan to purchase a car, the car is hypothecated to the bank, which means the bank has a legal claim to the car until the loan is

fully repaid.

How to understand Hypothecation :

Hypothecation makes it easier for borrowers to secure loans by using their assets as collateral.

It lowers interest rates be c ause lenders have collateral to protect their investment.

Uses of Hypothecation:

It is commonly used for vehicle loans, business loans, working capital loans, and loans against goods.

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Hypothecation