The agreement made for hypothecation between the borrower and the lender is known as the hypothecation agreement. Hypothecation is a method whereby the borrower pledges his assets as collateral to the lender to secure a loan. Here, the lender holds no possession over the assets of the borrower. There is no transfer of possession, ownership, or title of the assets. However, if the terms of the agreement are not fulfilled then the lender has a right to seize the assets.
Hypothecation occurs mostly when it comes to mortgage lendings. For example in cases of the mortgage by banks, a rental property may be given as collateral through hypothecation. Here the bank does not have any rights on the property, however, there are any defaults on payments then the bank has the right to seize the said property. Hypothecation is also used in the securities trading and investment field in the form of margin lending.
Hypothecation works for both, the lender and the borrower. It provides security to the lender in form of collateral pledged and for the borrower, this method is much easier and the interest rate provided is much lower than unsecured loans.
Hypothecation in investing works by the way of margin lending. When an investor opts for buying securities on margin, the common condition they agree to is that when there is a margin call, these stocks or securities can be sold off by the brokers. The ownership of the securities remains with the investor, but the broker has the right to sell them if there is an issue of margin call the investor cannot fulfill, therefore to cover up the loss the broker can sell those securities. A margin call is when the investor borrows the money from the broker to invest, and the ownership of the investor drops below a certain threshold. Therefore, when such losses occur the securities in the investor's account acts as collateral and the brokers can sell them if needed.
At times the lenders may use the collateral of the borrower to meet their own obligations, this process is called re-hypothecation. There are various factors on which re-hypothecation depends such as the number of times a particular asset has been re-hypothecated, as re-hypothecation can create market risks at times. Therefore one has to be careful while doing so.
Thus, Hypothecation is another form of a loan which the borrower seeks through collateral. This way the borrower can still hold the ownership, title, and possession of the property. However, it is to be kept in mind that by defaulting on the conditions of repayment of the loan on the side of the borrower, this collateral could be seized by the lender.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.