Hypothecation occurs when an asset is pledged as collateral to secure a loan. The owner of the asset does not give up title, possession, or ownership rights, such as income generated by the asset. However, the lender can seize the asset if the terms of the agreement are not met.

What is meant by hypothecation agreement?

An agreement between a borrower and a lender where by the borrower pledges asset as collateral on a loan without the lender taking possession of the collateral.

What is the purpose of hypothecation agreement?

A hypothecation agreement allows a borrower to use an asset's value to give a money lender extra security in the event that they default on a loan. Other agreements like mortgage deeds or deeds of trust offer a similar kind of security, but the borrower does not technically list an asset as a piece of collateral.