Meaning of Pledge and hypothecation?

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Hypothecation occurs when an asset is pledged as collateral to secure a loan. The owner of the asset does not give up title, possession, or ownership rights, such as income generated by the asset. However, the lender can seize the asset if the terms of the agreement are not met. Hypothecation is different from a mortgage, lien, or assignment.

Hypothecation in Mortgages

Hypothecation occurs most commonly in mortgage lending. A mortgage is a type of loan that's secured by an underlying property. The borrower technically owns the house, but because the house is pledged as collateral, the mortgage lender has the right to seize the house if the borrower cannot meet the repayment terms of the loan agreement—which occurred during the foreclosure crisis.

Auto loans are similarly secured by the underlying vehicle. Unsecured loans, on the other hand, do not work with hypothecation because there is no collateral to claim in the event of default. As hypothecation provides security to the lender because of the collateral pledged by the borrower, it is easier to secure a loan, and the lender may offer a lower interest rate than on an unsecured loan.

Pledge in simple words means-

a solemn promise or agreement to do or refrain from doing something:

a pledge of aid; a pledge not to wage war.

something delivered as security for the payment of a debt or fulfillment of a promise, and subject to forfeiture on failure to pay or fulfill the promise.

More detailed view-

1. a serious promise or agreement

He has promised to fulfill/honor/keep a campaign pledge to cut taxes.

She refused to take a pledge of silence. [=she said she wouldn't promise to stay silent]

2.  a promise to give money

To make a pledge or donation, please call the charity's office.

The company has made a pledge of over $3,000.

3. something that you leave with another person as a way to show that you will keep your promise

He left his car as a pledge that he would return with the money.

4. US : a person who has promised to join a college fraternity or sorority but who has not been officially accepted into the group

Our sorority usually accepts 10 pledges each year.

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