Everyone wants to buy a car of their own. But not everyone can afford to buy a car as it involves a huge investment. Even buying the most basic car requires a couple of lakh rupees making it difficult for some people to afford it. As a result, a lot of people purchase their car with the help of a car loan.
A car loan is available for every car, provided you pay a part of the total cost through a down payment. The remaining amount is paid by the bank on your behalf and you are required to pay the loan amount over the next few years in easy instalments. This situation gives rise to hypothecation.
What is Hypothecation?
Hypothecation is the practice of pledging your newly-purchased car as collateral to the bank that gave a loan for your car. It refers to the situation where your car becomes collateral for the bank and acts as a monetary guarantee for the repayment of the loan. Hence, the car becomes the property of the bank, which granted you a car loan, unless you repay the entire loan amount.
Although the newly-purchased car is in your physical possession, it is legally owned by the bank due to hypothecation until the loan is repaid. You cannot sell or transfer the ownership of your car as long as it is hypothecated to the bank.
How Does Car Loan Hypothecation Work?
Every car is registered by the Regional Transport Office (RTO) in the name of its owner whether it has been purchased on full payment or by taking a loan. In the case of hypothecation too, your local RTO will register your newly-purchased car in your name and your car registration certificate (RC) will bear your name.
But since the car has been financed by the bank, the RTO will make a note of the hypothecation and your RC will mention your car in the favour of the bank that granted you the loan. The RC will bear this note unless you repay the loan amount.
Hypothecation in Car Insurance
If you have purchased your car through a bank loan, your car insurance policy will also carry the hypothecation note. Just like the RTO, your motor insurance company will also note the hypothecation of your car and mention your car insurance policy in the favour of the bank that sanctioned you the car loan.
Similar to your RC, your car insurance policy will also mention the hypothecation of your car unless you repay the loan. Even if you renew your policy or change your motor insurer, the hypothecation note will exist on your car insurance policy.
How to Add Hypothecation to Your Car Insurance Policy?
To add hypothecation to your car insurance policy, just inform your motor insurer about it at the time of buying and renewing your policy. The insurer will also ask you if you have taken a loan to buy your car to know about its hypothecation.
Besides, you will need to submit a few documents to your motor insurance provider at the time of buying the policy, including the RC of your car, which mentions the hypothecation of your car.
How to Remove Hypothecation from Your RC & Car Insurance Policy?
The hypothecation of your car can be removed from your RC and your car insurance policy once you have repaid your loan amount completely. After the loan repayment, you will have to apply to remove hypothecation from your RC and your car insurance policy as it will not happen on its own. Follow the steps given below to remove hypothecation from your RC and car insurance policy:
Step 1 – Obtain the No Objection Certificate (N.O.C) from your bank stating that you have repaid your car loan in full.
Step 2 – Visit your local R.T.O and submit the documents required to cancel the hypothecation note on your car’s RC.
Step 3 – Pay the hypothecation cancellation fee at the R.T.O. The fee may vary from state to state and so you should check the prescribed fee for your state.
Step 4: The RTO officer will initiate the process of removing the hypothecation note from your RC.
Step 5: Your RC will be updated and you will be issued a new RC without the hypothecation note.
Step 6: Inform your motor insurer about the removal of hypothecation and submit a copy of your new RC to them.
The hypothecation will be removed from your car insurance policy and you will be issued an updated policy document.
Documents Required to Remove Hypothecation from Your RC
You need to submit the following documents to your local RTO to remove the hypothecation note from your RC. Take a look:
- NOC from the bank
- Form 35
- PUC certificate of your car
- Car insurance policy document
Summing It Up
A major population in India buy a car with the help of a bank loan and end up hypothecating their car to the bank until they repay the loan amount. If you too have bought a car via loan and had to hypothecate it, you must know the process to remove it. This article will surely help you to get all the information on car hypothecation in one place.