What does "hypothecation" refer to in the context of loans?

Hypothecation refers to the process of using a property as collateral for a loan while retaining possession of that property. This means that the borrower is able to continue using the property even though it is pledged as security for the loan. In such arrangements, if the borrower fails to meet their repayment obligations, the lender has the right to take possession of the asset, but the borrower does not lose possession until a default occurs.

The concept is significant in the world of real estate and personal loans, as it allows borrowers to access funds without having to part with the asset they are pledging. This can be particularly beneficial for homeowners and businesses that need to leverage their assets for additional financing while still maintaining control and use of those assets.

In contrast, the other options do not accurately describe hypothecation. The method of selling property through foreclosure involves the lender taking possession after a default, rather than allowing the borrower to retain possession. Loans secured by personal property rather than real estate are a different category, and a financial arrangement where the borrower retains full ownership of the asset would not typically involve any form of collateral security, which is central to the definition of hypothecation.