Which term describes pledging property as security for a loan without giving up possession?

• A. Mortgage
• B. Encumbrance
• C. Lien
• D. Hypothecation

Answer: (D)

Pledging property as security for a loan without giving up possession is hypothecation. In this arrangement, the borrower provides the property as collateral and the lender has a security interest (a lien) in that property, but the borrower retains ownership and continues to use the property. This is how many loans, including real estate loans, are structured: the loan is secured by the property, yet possession stays with the borrower.

A mortgage, while closely related, is the instrument that creates the security interest and lien on the property, not the act of pledging itself. An encumbrance is a broader term for any claim or restriction on the property, such as easements or liens. A lien is the creditor’s claim on the property resulting from the loan, not the act of pledging the property as security.