Hypothecation

Hypothecation increases the incentive of the individual to pay back the loan, while raising the confidence of the loaner that the debt will be repaid. As part of hypothecation, the individual or institution giving the loan does not have access to the asset, or any income generated from the asset, so long as the principle and interest payments are made. In the event the asset owner defaults on their loan, the loaning agent can seize the asset used as collateral. Hypothecation is most common in mortgage lending.