{"id":25767,"date":"2022-06-16T07:17:29","date_gmt":"2022-06-16T07:17:29","guid":{"rendered":"https://www.5paisa.com/finschool/?post_type=finance-dictionary\u0026#038;p=25767"},"modified":"2024-10-14T16:51:01","modified_gmt":"2024-10-14T11:21:01","slug":"hypothecation","status":"publish","type":"finance-dictionary","link":"https://www.5paisa.com/finschool/finance-dictionary/hypothecation/","title":{"rendered":"Hypothecation"},"content":{"rendered":"\u003cdiv data-elementor-type=\u0022wp-post\u0022 data-elementor-id=\u002225767\u0022 class=\u0022elementor elementor-25767\u0022\u003e\u003csection class=\u0022elementor-section elementor-top-section elementor-element elementor-element-da840ed elementor-section-boxed elementor-section-height-default elementor-section-height-default\u0022 data-id=\u0022da840ed\u0022 data-element_type=\u0022section\u0022\u003e\u003cdiv class=\u0022elementor-container elementor-column-gap-default\u0022\u003e\u003cdiv class=\u0022elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-d6861b6\u0022 data-id=\u0022d6861b6\u0022 data-element_type=\u0022column\u0022\u003e\u003cdiv class=\u0022elementor-widget-wrap elementor-element-populated\u0022\u003e\u003cdiv class=\u0022elementor-element elementor-element-b187bbb elementor-widget elementor-widget-text-editor\u0022 data-id=\u0022b187bbb\u0022 data-element_type=\u0022widget\u0022 data-widget_type=\u0022text-editor.default\u0022\u003e\u003cdiv class=\u0022elementor-widget-container\u0022\u003e\u003cp\u003eHypothecation means offering an asset as collateral security to the lender. The ownership lies with a lender, and the borrower enjoys the possession. In the case of default by the borrower, the lender can exercise his ownership rights to seize the asset.\u003c/p\u003e\u003cp\u003eThe possession of the asset remains with the lender in case of a pledge, while it remains with the borrower in case of hypothecation. Common examples include the gold loan in case of pledge and vehicle loan in case of hypothecation.\u003c/p\u003e\u003cp\u003e\u003cimg fetchpriority=\u0022high\u0022 decoding=\u0022async\u0022 class=\u0022size-medium wp-image-25769 aligncenter\u0022 src=\u0022https://www.5paisa.com/marathi/finschool/wp-content/uploads/2022/06/TRIST-300x169.jpg\u0022 alt=\u0022\u0022 width=\u0022300\u0022 height=\u0022169\u0022 srcset=\u0022https://www.5paisa.com/marathi/finschool/wp-content/uploads/2022/06/TRIST-300x169.jpg 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/06/TRIST-150x85.jpg 150w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/06/TRIST.jpg 420w\u0022 sizes=\u0022(max-width: 300px) 100vw, 300px\u0022 /\u003e\u003c/p\u003e\u003ch3\u003e\u003cstrong\u003eExample\u003c/strong\u003e\u003c/h3\u003e\u003cp\u003eSuppose Mr. X is a drug distributor (wholesaler) require a loan of Rs.10,00,000/- to increase the supply of medicine. He approaches his bank and asks for a debt called CC Loan. The bank doesn’t want to provide him with an unsecured loan that’s why Mr. X was asked to pledge his existing inventory with the bank as a security. Bank doesn’t keep the stocks with itself, however, the inventory will be hypothecated. In this case, neither possession nor ownership of stocks is transferred to the lender/ banks.\u003c/p\u003e\u003ch2\u003e\u003cstrong\u003eImportant Points of Hypothecation\u003c/strong\u003e\u003c/h2\u003e\u003cul\u003e\u003cli\u003eThe concept of hypothecation is defined in Section 2 of SARFAESI ACT 2002.\u003c/li\u003e\u003cli\u003eHypothecation is also created on movable properties only like pledge.\u003c/li\u003e\u003cli\u003eNeither ownership nor possession of the movable properties/goods is transferred to the banks or financial institutions.\u003c/li\u003e\u003cli\u003eIn the case of hypothecation, the charge created is the equitable charge.\u003c/li\u003e\u003cli\u003eIf the borrower defaults the loan, the lender will first seize and take possession of assets then he can go for auction to recover the debt.\u003c/li\u003e\u003cli\u003eThe borrowers don’t have the rights to sell the hypothecated assets until the debt obligation is fulfilled.\u003c/li\u003e\u003c/ul\u003e\u003ch2\u003e\u003cstrong\u003eWhat is Rehypothecation ?\u003c/strong\u003e\u003c/h2\u003e\u003cul\u003e\u003cli\u003eRehypothecation is when a lender uses your collateral as collateral of its own. If your lender needs to meet certain contractual agreements, it might use your property to do so.\u003c/li\u003e\u003cli\u003eWhile possible, this practice isn’t as common as it was before the 2008 economic downturn. Because the collateral continues to get rehypothecated, it becomes less clear who really owns the asset.\u003c/li\u003e\u003cli\u003eYou can avoid rehypothecation in investing by opening traditional brokerage cash accounts and not margin accounts. This means you’re avoiding borrowing money to make purchases, and instead using your own funds.\u003c/li\u003e\u003c/ul\u003e\u003ch2\u003e\u003cstrong\u003eHypothecation Agreement \u003c/strong\u003e\u003c/h2\u003e\u003cp\u003e\u003cstrong\u003eReduction of down payment\u003c/strong\u003e\u003c/p\u003e\u003cp\u003eThe amount of down payment that a borrower owes can be reduced by hypothecating an asset because the borrower is pledging a high-value asset to guarantee his loan, rather than in a traditional mortgage, which uses loan-to-value ratios and credit score to vet a borrower. Hence, borrowers choosing to hypothecate an asset to secure a loan may be eligible for reduced down payments and this can make it easy to secure financing.\u003c/p\u003e\u003cp\u003e\u003cstrong\u003eRetain the title\u003c/strong\u003e\u003c/p\u003e\u003cp\u003eBorrowers can retain the title, i.e. total ownership rights of their hypothecated assets. If you are sure that you will be able to pay off your loan, you don’t need to worry about the possibility of a third party holding the title to your asset.\u003c/p\u003e\u003cp\u003e\u003cstrong\u003eGreater security for lenders\u003c/strong\u003e\u003c/p\u003e\u003cp\u003eHypothecation provides security for lenders on high-risk loans, especially for commercial mortgages where the loan payment relies on the success of a commercial business.\u003c/p\u003e\u003ch2\u003e\u003cstrong\u003eConclusion\u003c/strong\u003e\u003c/h2\u003e\u003cp\u003eHypothecation is a financial arrangement in which a borrower pledges an asset as collateral to secure a loan, without transferring ownership of the asset to the lender. The borrower retains possession and use of the asset, but if they default on the loan, the lender has the right to seize and sell the asset to recover the outstanding debt. Hypothecation is commonly used in cases like vehicle loans, where the car is pledged as collateral, or in stock margin trading. It allows borrowers to access credit while using their assets to provide security for lenders, reducing the lender\u0026#8217;s risk.\u003c/p\u003e\u003cp\u003e \u003c/p\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/section\u003e\u003c/div\u003e","protected":false},"excerpt":{"rendered":"\u003cp\u003eHypothecation means offering an asset as collateral security to the lender. The ownership lies with a lender, and the borrower enjoys the possession. In the case of default by the borrower, the lender can exercise his ownership rights to seize the asset. The possession of the asset remains with the lender in case of a … \u003ca title=\u0022Hypothecation\u0022 class=\u0022read-more\u0022 href=\u0022https://www.5paisa.com/marathi/finschool/finance-dictionary/hypothecation/\u0022 aria-label=\u0022Read more about Hypothecation\u0022\u003eRead more\u003c/a\u003e\u003c/p\u003e","protected":false},"author":1,"featured_media":32434,"parent":0,"menu_order":228,"comment_status":"closed","ping_status":"closed","template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"class_list":["post-25767","finance-dictionary","type-finance-dictionary","status-publish","format-standard","has-post-thumbnail","hentry","finance-dictionary-terms-h"],"acf":[],"_links":{"self":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/finance-dictionary/25767","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/finance-dictionary"}],"about":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/types/finance-dictionary"}],"author":[{"embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/users/1"}],"replies":[{"embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/comments?post=25767"}],"version-history":[{"count":15,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/finance-dictionary/25767/revisions"}],"predecessor-version":[{"id":62441,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/finance-dictionary/25767/revisions/62441"}],"wp:featuredmedia":[{"embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/media/32434"}],"wp:attachment":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/media?parent=25767"}],"curies":[{"name":"wp","href":"https://api.w.org/{rel}","templated":true}]}}