Hypothecate means to pledge something as security for a loan, without the actual delivery of the item pledged. For example, a car may be collateral for a car loan, although possession remains with the borrower.
Hypothecation 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.
[Last updated in April of 2022 by the Wex Definitions Team]