What is Hypothecation? Meaning, Types And Advantages

A hypothecation loan is a standard option for borrowing money against a valuable asset available in your possession. Backed by collateral, this secured loan allows you to acquire a high-value sum at a comparatively lower interest rate than unsecured loans.

With this option, you do not have to hand over the deeds or the rights of the pledged collateral. Knowing the meaning of hypothecation in banking and its applicability allows you to decide whether it is the right option. Read on to know the definition of hypothecation, its benefits and drawbacks and more. 

What is Hypothecation?

Hypothecation is a type of loan where lenders offer you financial assistance against any asset without taking ownership. In simple terms, you can continue using the asset during the loan tenure without restriction. However, if you can’t pay your loan, lenders have the right to seize it. 

In most cases, you pledge the product you are taking a loan for. This way, financial institutions protect themselves against the risk of losing money. Once the loan is completely paid, you can reclaim the asset. The most common example is that of a home loan mortgage, where the property acts as collateral.

Types of Assets Eligible for Hypothecation

To better understand the meaning of hypothecation in banking, you should know the different types of loans it includes.

• Property Loan

Assume you’ve taken a loan to build a house, which you then plan to give it for rent. In this case, the property or the building remains collateral, but the bank or financial institution has no right over the generated rental income. 

• Car Loan 

When you get a hypothecation for a car loan, the bank offers you a complete loan amount for the vehicle’s value. The bank may take possession of the documents temporarily during the loan tenure. Meanwhile, you can continue using the vehicle for your daily commute or travelling. 

• Home Loan

This is another example of a hypothecation loan where you continue residing in your home pledged as collateral. This type of loan favours the borrower, as they do not have to pay EMI and rent at the same time. This makes timely loan repayment easier. 

• Business Loan for Inventory 

Hypothecation is also a great option to buy business inventory and equipment when you cannot pay in a lump sum. Using this option, you can buy raw materials, heavy-load machinery, everyday use equipment and other products needed for your business. This helps you continue the work and generate income to repay your loan comfortably. 

Also Read :  Unsecured Loans Versus Secured Loans

Advantages of Hypothecation

Here are some benefits offered by this unique banking facility to meet your financial requirements:

• You can easily obtain a large loan amount as lenders have a lower risk due to the collateral present 
• The risk of extending this loan is lower compared to an unsecured loan, so you can enjoy lower interest rates, making it a pocket-friendly option
• Since there is no requirement to make a title change or ownership transfer, it has a faster processing time
• You can continue using the pledged collateral, so it does not affect your everyday lifestyle

Risks of Hypothecation

Here are some precautions you should maintain when opting for this type of loan: 

• This loan has a higher risk of losing collateral as the bank can rightfully seize your asset and auction it if you default
• In case the lander cannot recover the entire loan amount after auctioning the asset, you may face legal action
• Due to the nature of these loans, they have a longer tenure, which can add to your financial liability 
• You cannot sell your own property or vehicle to arrange for cash 
• Defaulting on such a loan can negatively impact your credit score 
  
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While a hypothecation loan has its pros and cons, not everyone has assets available that can be pledged to get a sizeable loan amount. If your collateral does not give you sufficient funds to meet your financial requirements, then the risk is higher compared to the reward. In such a case, an unsecured personal loan is ideal. 

The Fibe Online Personal Loan is one option you can consider to get financing up to ₹5 lakhs for 

your planned and unplanned expenses. Its pocket-friendly interest rate and flexible tenure of up to 36 months make it an affordable loan option. 

Furthermore, the minimum documentation and easy-to-meet eligibility criteria help you avail of a quick loan for any financial emergency. Download our Personal Loan App from Google App Store or Apple Play Store, or visit our website for a hassle-free online application process. 

FAQs on Hypothecation

What is an example of hypothecation?

Home loans, vehicle loans, and loans to buy inventory are some of the most common examples of hypothecation.

What are hypothecation charges?

When you buy the car on loan, it is bank property until you’ve repaid the complete loan amount. Therefore, the bank’s name is on the RC. If you want to remove the bank’s name, you must pay an additional fee to the RTO and the bank’s NOC. This fee is called the hypothecation charge.