Hypothecation in car insurance

car insurance

A car has become a need in today’s age as it gives you the convenience of travelling from one place to another. You can buy a new car or a used one depending on your needs. However, paying for a car is no mean feat. You need considerable funds at your disposal to buy a car, either new or second-hand. If you have saved up enough, you can pay the outright amount and own the car. If not, a car loan can come in handy.

Various banks and NBFCs offer car loans for used and new cars. These loans finance the car and allow you to become its owner. Car loans are convenient as you can repay them, affordably, over a chosen tenure. They allow you to afford a car and are, therefore, quite popular among car buyers.

When you avail of a car loan to buy a car, the concept of ‘hypothecation’ comes into play. Let’s understand what hypothecation means and how it impacts your ownership.

What is the hypothecation of vehicle?

If you finance any vehicle through a loan, you need to hypothecate the vehicle to the lender. Hypothecation of vehicle means that the vehicle would be owned by the lender until the loan is paid off. If you default on repayment, the lender can sell off the vehicle to realize the outstanding loan amount.

Procedure for car loan hypothecation

When you buy a car, you would have to register your car with the Regional Transport Office (RTO). The RTO would issue a Registration Certificate (RC) mentioning your name as the owner of the car. However, if you have availed of a car loan to finance the car, the details of hypothecation would also be mentioned in the RC book.

The RC book would contain the details of the lender from whom the loan has been availed. It would also mention that the car would be hypothecated to the lender and the date of such hypothecation. When you buy a car insurance policy, the policy would also acknowledge the carhypothecation and mention the same on the policy document.

How to add hypothecation to the car insurance plan?

Usually, the details of car hypothecation are included by the insurance company automatically when you insure your car. At the time of buying a car insurance plan, the insurance company requires you to submit the RC book of the car. Since the hypothecation details are mentioned in the RC book, the insurance company records the details in the car insurance policy too.

At the time of renewals, you are asked whether the loan is running or has been paid off. The insurance company might also check your RC book to check the details of the car hypothecation. If your loan is running, the renewed policy would also contain the hypothecation details and if the loan has been paid off, you can apply for removal of the hypothecation details from your insurance policy.

Documents for car hypothecation

For adding the details of hypothecation to your car when registering it at the RTO, you would have to furnish the following documents –

  • The Registration Certificate of the car, in original
  • Application for hypothecation in Form 34
  • PUC certificate
  • Valid third party insurance covers the car and is details
  • Receipt of the fee that you paid to get the hypothecation endorsed by the RTO
  • Your address proof
  • Self-attested copy of your PAN Card

How to remove car hypothecation?

Once you have paid off the car loan, it is recommended that you get the car hypothecation removed. Removal of hypothecation is a two-part process. First, you would have to get the hypothecation removed from the RC book through your RTO. Second, you would have to get the hypothecation removed from your car insurance policy. Let’s understand removal in both parts in details –

Removing hypothecation from the RC book

  • After you have cleared off the car loan, get a No Objection Certificate (NOC) from the lender. The certificate shows that the loan is paid off and that the lender has no issues with the cancellation of car hypothecation.
  • You would, then, have to visit the RTO and make an application for the removal of hypothecation. To do so, you would have to apply in Form 35 which is for hypothecation removal.
  • Fill up Form 35 and submit it to the RTO along with the following documents –
    • NOC issued by the lender
    • Loan closure letter or the loan statement from the lender showing the loan has been paid in full
    • Copy of a valid third party liability insurance policy on the car
    • A valid PUC certificate
  • Once you submit the documents, you would also have to pay a fee for the cancellation of the hypothecation. This fee depends on the state in which your vehicle is registered. You can check the fee on the transport department’s website.
  • Pay the fee and submit the documents. The RTO would verify the documents and if everything is found to be in order, your car hypothecation would be cancelled.
  • Once cancelled, the RTO would issue a fresh Registration Certificate (RC) where the details of hypothecation would not be mentioned. When receiving a new RC, you can also apply for a Smart Card RC. This would require you to pay an additional fee and the RTO would issue the new RC in the form of a smart card.

Removing hypothecation from the insurance policy

Once you have received the new RC from the RTO, you can apply for the removal of hypothecation details from your car insurance policy. For this, you should request the insurance company for removing the hypothecation from your car insurance policy. Submit the NOC, a copy of your existing policy and a copy of your new RC book. The insurance company would verify the details and remove the details of hypothecation from your car insurance policy.

How to check hypothecation removal status?

You can check the status of vehicle online to find out whether the hypothecation has been removed or not. After you submit the hypothecation removal request to the RTO, it takes some time before the RTO issues a new RC book. During this time, if you want to check the hypothecation status of vehicle online, you can do so through the Parivahan website of the Government. The process is as follows –

Importance of hypothecation and its removal

Hypothecation gives the lender collateral against repayment defaults. The lender remains the rightful owner of the car during the loan repayment. This gives the lender the right to sell off the vehicle to realize the outstanding loan amount if you fail to repay the loan on time. Thus, if you don’t pay off the loan in full, the lender’s loss is averted.

Once you have repaid the loan, however, removal of hypothecation is equally important. By removing the hypothecation from your car, you become the legal owner and have the right to sell the car when you want. 

So, know what car hypothecation is all about, how to add it and how to remove it when you buy your dream car.

Frequently Asked Questions

  1. I want to sell my car second hand. Can I do so if it is still hypothecated to the bank?

    As long as the loan is not repaid and you don’t avail of the NOC, selling your car second hand can create a problem. So, it is better to pay off the loan and then put up your car for sale

  2. I want to buy a second-hand car. How to check hypothecation status of the car?

    You can check the RC book of the car that you intend to buy. If the car is hypothecated, the RC book would state the same. Alternatively, you can visit the Parivahan website of the Government, enter the car’s registration number and check its hypothecation status online.

  3. My car is hypothecated and it has been stolen. Who would get the claim?

    Since the car is hypothecated, it is the property of the lender. Moreover, in case of theft, the lender suffers a loss since the lender paid for the car. Thus, the insurance claim would be paid to the lender if your car is stolen.

  4. Can I opt for the removal of hypothecation online?

    Yes, you can request the removal of hypothecation online on the Parivahan website of the Government. However, for submitting Form 35 and the relevant documents for the removal of hypothecation, you would have to visit the local RTO. 

  5. I forgot to get the hypothecation removed on renewal. Can I do it now?

    Yes, you can remove the hypothecation even after renewal. Just submit a written request to the insurance company as well as the documents required for removal, i.e. the NOC from the lender and a new and updated RC book. The insurance company would verify the details and remove the hypothecation.

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