Hypothecation in Car Insurance- Everything You Need to Know

Owning a car is a luxury and one big investment. Gone are the days when buying a car was a task. Today we have multiple banks and other financial agencies providing car loans at different interest rates.

Avail the car loans by following the process for a flexible period, which can be repaid in instalments. Possibly, you might be planning to buy the car with a car loan.

If you are then, while you are finalizing the car you will come across this word ‘hypothecation’.

Wondering, what does hypothecation mean in context to a car loan?

Read on!

In simple words, hypothecation is a practise wherein when applying for a loan and you are required to pledge an asset that is the car. This is done to ensure that until the repayment of the loan is done the car is kept as a security or collateral.

It essentially implies that the respective bank holds the car until the time-frame of the loan. Undoubtedly, you will have the physical possession of the car.

Understanding Procedure of Car Loan Hypothecation

Now, let us take you through the process of car loan hypothecation.

Even when you buy a car, it is registered at the Regional Transport Authority (RTO) in your name. Likewise, the Registration Certificate (RC) will also be issued in your name.

However, it is to be noted and duly understood that the registration certificate of the car will have a note, which states that the car is in the favour of the bank, which has sanctioned the car loan. This means that until the time the loan amount is paid back to the bank the owner of the car is the bank.

Likewise, car insurance coverage will also be in favour of the bank. It is to be understood that the possession of the car will remain with the buyer of course and can be easily used.

Paid the Last EMI of Your Car Loan- Now, What After That

If you think that after paying the last monthly instalment against the car loan taken and now you can sit at peace. Then do not sit at ease. The task is still unfinished.

Thinking, what next?

Read below and will let you know. Listed below are essential aspects that you need to take care:

Update Car Insurance Policy

The information of hypothecation is recorded by the car insurance policy. 3rd party car insurance is a legal mandate in India. However, it is advisable to opt for a comprehensive car insurance policy.

It is important to remove hypothecation in car insurance once you have completely repaid the loan amount. To remove, hypothecation from the car insurance policy, one needs to submit the NOC and revised registration certificate of the car to the car insurance company.

  • Collect Payment Receipt: When you have made the last payment of the EMI or did a prepayment to close the loan on the car, without a fail take final receipt of payment from the bank. This final receipt of payment includes important details such as the total amount paid, date of the last payment made and the closure of the loan taken on the car.
  • Ask for the Repayment Statement: Another essential aspect is to collect the complete repayment statement of the car loan from the respective bank. This is helpful under circumstances of any discrepancy and when updating the credit history. Besides, it is also helpful in times of any conflicts arising during the selling process of the car or while claiming car insurance, and so forth.
  • Remove Hypothecation: Until the time the loan amount is not repaid to the bank the hypothecation cannot be removed. If you wish to own the car rightfully, remove hypothecation.

Is It Important to Remove Hypothecation From Car?

Yes, it is important to remove the hypothecation from the car. Hypothecation can only be removed if the buyer has repaid the entire loan amount to the bank.

Once you have paid all the EMI’s against the car loan. Make sure that you obtain a ‘No Objection Certificate’ (NOC) and Form 35 from the respective bank. Having a NOC essentially implies that the bank has no objection upon the removal of hypothecation. Form 34 states the conclusion of the agreement between the bank and the person who has taken the loan in regards to the hypothecation.

NOC is a document, which assures that now you have no pending dues left with the bank on the loan taken. Most likely, the NOC is sent by the bank via post or even online.

Once you receive the no-objection certificate, you need to submit the copy of the equivalent to the regional transport authority and the respective car insurance company. The validity of the NOC is for three months from the date of issuance.

After the documents are submitted and verified by the RTO, the registration certificate document will get updated having your name as the owner. It is then that the RTO will place a stamp, which indicates that the hypothecation from the car has been removed.

This means that you are the complete owner of the car.

What Are The Different Documents Required For Car Hypothecation?

When purchased the car on loan, it is imperative to include the car purchasing process in the vehicle registration certificate. Listed below are the documents that will be required for the approval:

  • The original registration certificate (RC)
  • Copy of attested car insurance policy
  • Attested copies of owners address proof
  • Attested copy of PAN Card
  • Copies of filed Form 34 which will be required for the endorsement of hypothecation
  • Prescribed fees
  • Form 60 and Form 61 (depending on the applicability)

What Are the Documents to be Taken to the RTO?

Listed below are the documents that need to be taken and submitted to the RTO:

  • Original registration certificate of the car
  • Copy of car insurance policy
  • Copy of driving license
  • Self-attested copies of Form 35
  • Copy of pollution under control (PUC) certificate
  • Copy of NOC

Important: Do Not Forget to Carry RC Smart Card

You will be given a specific day, on that day visit the RTO and collect the acceptance form along with the details. If required and applicable, make the changes in the form.

Apply for a Smart Card by paying nominal fees. Within a few days of payment initiation, the Smart Card RC can be collected from the RTO. Having a Smart Card RC ensures the ownership of the car rightfully.

Wrapping It Up

Therefore, make sure that when the car loan is cleared off, hypothecation needs to be removed. And, the same needs to be updated in the registration certificate of the vehicle.

The information of hypothecation in car insurance should also be taken care and the car insurance provider should also be informed.

Besides, check and re-check for all the information you have provided and adhere to the process and timelines to avoid any problem later.

Moreover, while buying a car make sure that you buy a car insurance policy online or offline and secure yourself from any perils that may lead to an unwanted monetary expense.

Written By: PolicyBazaar - Updated: 10 June 2020
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