Plain English
Hypothecation is pledging an asset as collateral for a loan while retaining ownership of it. The lender has a claim on the asset if you default, but day-to-day ownership and economic exposure remain with you. The legal foundation of mortgages, margin loans, SBLOCs, and crypto-collateralized loans.
How it actually works
When you hypothecate an asset, you sign a security agreement that gives the lender a perfected security interest. If you default, the lender can seize and sell the collateral. While the loan is outstanding, you still own the asset, receive its income, and benefit from its appreciation — subject to the lender’s lien. Rehypothecation is when the lender pledges your collateral to a third party as collateral for their own borrowing.
What it means for you
For HNW members, understanding hypothecation versus rehypothecation matters: it determines whether your collateral can be pulled into someone else’s default chain. Major brokerage SBLOC agreements typically include rehypothecation rights, which is one reason private-bank pledged-asset lines often have stricter terms.
We cover hypothecation and rehypothecation in detail for members evaluating different lending products. The structural protections vary across SBLOC, margin loans, pledged-asset lines, and crypto-collateralized loans.
Educational content only. Not investment, tax, or legal advice.