Hypothecation is a financial practice where a borrower pledges an asset as collateral to secure a loan or credit line from a lender while retaining ownership and possession of the asset. In hypothecation, the borrower retains the right to use the pledged asset for its intended purpose, such as operating a business or generating income, while the lender holds a security interest or lien on the asset to protect against default. If the borrower fails to repay the loan or meet the agreed-upon terms, the lender has the right to seize the pledged asset and liquidate it to recover the outstanding debt. Hypothecation is commonly used in various financing arrangements, including margin lending, secured loans, and asset-based lending, where borrowers require funds but wish to retain control and use of their assets. Understanding hypothecation is essential for borrowers and lenders to assess credit risk, establish collateral requirements, and manage financial obligations effectively.