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Simple English definitions for legal terms
hypothecate
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A quick definition of hypothecate:
Term: hypothecate
Definition: Hypothecate means to promise something valuable as a guarantee for a loan, without giving it away. For example, if you borrow money to buy a car, the car can be used as collateral, but you still get to keep and use the car. If you don't pay back the loan, the lender can take the car to pay off the debt. But if the car doesn't cover the full amount owed, you won't be held responsible for the remaining debt.
A more thorough explanation:
Definition: Hypothecate means to pledge something as security for a loan, without actually delivering the item pledged. This creates a right by the creditor to liquidate the property to satisfy the debt in the event of default. If the debt is not paid, the creditor may have the property seized to satisfy the debt. In the event that the collateral does not pay off the debt, the person hypothecating the property is not personally liable.
Example: A car may be collateral for a car loan, although possession remains with the borrower. If the borrower defaults on the loan, the lender can seize the car and sell it to pay off the debt. The borrower is not personally liable for any remaining debt after the sale of the car.
Explanation: Hypothecation is a common practice in lending, where the lender requires collateral to secure the loan. This reduces the risk for the lender, as they have a right to seize and sell the collateral if the borrower defaults on the loan. The example of a car loan illustrates how the car is pledged as collateral, but the borrower still retains possession of the car. If the borrower fails to repay the loan, the lender can seize the car and sell it to recover the debt. The borrower is not personally liable for any remaining debt after the sale of the car.