What does hypothecation involve?

What does hypothecation involve?

• A. Passing of legal title to a third party until a loan is repaid
• B. Pledge of property as collateral for a loan while continuing to possess it
• C. Maker and payee arrangement
• D. Promise to discharge the lien on the property once the loan is repaid

Answer: (B)

Hypothecation involves the pledge of property as collateral for a loan while allowing the borrower to retain possession of the property. This means that the borrower can continue to use and occupy the property, even though it is pledged as security for a debt. In the event of default, the lender has the right to take possession of the property to satisfy the loan obligation, but until that time, the borrower maintains control. This practice is commonly used in various types of financing, particularly in mortgage transactions, where the home is used as collateral for the mortgage loan. It enables borrowers to leverage their assets to obtain financing without losing access to those assets during the term of the loan.

Hypothecation involves the pledge of property as collateral for a loan while allowing the borrower to retain possession of the property. This means that the borrower can continue to use and occupy the property, even though it is pledged as security for a debt. In the event of default, the lender has the right to take possession of the property to satisfy the loan obligation, but until that time, the borrower maintains control.

This practice is commonly used in various types of financing, particularly in mortgage transactions, where the home is used as collateral for the mortgage loan. It enables borrowers to leverage their assets to obtain financing without losing access to those assets during the term of the loan.