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Hypothecation
Also called pledge, hypothecation agreement, third-party pledge.
Pledging an asset as security for a debt while keeping possession and use of it — the ordinary structure of almost every secured business loan.
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What it means
You keep the truck, the lender takes a security interest in the truck. That is hypothecation: a lien without dispossession. It is contrasted with a pledge in the strict sense, where the creditor takes physical possession of the collateral, and with an outright transfer of title.
Most commercial secured lending is hypothecation whether or not anyone uses the word. A UCC-1 filing perfects a security interest in collateral that stays in the debtor's hands and in productive use, which is the only arrangement that makes sense when the collateral is the thing generating the cash to repay.
Where the term is used explicitly
- Third-party hypothecation agreements, where somebody other than the borrower pledges their asset — a parent pledging a certificate of deposit, an affiliate pledging real property — to secure the borrower's debt. The pledgor is not a guarantor and does not owe the debt personally; they stand to lose the specific asset
- Securities-backed lines, where a portfolio is hypothecated and the lender's rights include rehypothecation, meaning the lender may in turn pledge your collateral to its own funding source
- Cross-collateralisation clauses, which hypothecate assets already securing one obligation to a second one
Where this one catches people
A third-party pledgor thinks their exposure is limited to the pledged asset, and usually it is — but only if the document is a pure hypothecation. Many are drafted as a hypothecation plus a guaranty, or contain a clause making the pledgor liable for any deficiency remaining after the collateral is sold. That converts a defined risk into an open one, and the two versions look nearly identical on the signature page.
Where you will meet this term
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Hypothecation — common questions
What does hypothecation mean?
Pledging an asset as security for a debt while keeping possession and use of it — the ordinary structure of almost every secured business loan.
Where does hypothecation catch people out?
A third-party pledgor thinks their exposure is limited to the pledged asset, and usually it is — but only if the document is a pure hypothecation. Many are drafted as a hypothecation plus a guaranty, or contain a clause making the pledgor liable for any deficiency remaining after the collateral is sold. That converts a defined risk into an open one, and the two versions look nearly identical on the signature page.
Is hypothecation the same as an interest rate?
Hypothecation is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does hypothecation apply to?
Term Loan, Business Line of Credit, Equipment Financing, Asset-Based Lending.
Is there a worked example of hypothecation?
Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.
What else should I read alongside hypothecation?
Collateral, Cross-collateralization, Guarantor, Lien, Security agreement.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.