Things You Need to Know About Hypothecation in Car Insurance
Buying cars has become easier for people now thanks to banks issuing car loans right away. However, this leads to the car being collateral for the bank until the loan is paid off in full. This process is known as hypothecation.
What is hypothecation in car insurance?
- Hypothecation is when the ownership of the car rests with the bank till the loan is entirely paid off. It is a pledge wherein the bank places the car as collateral or security. The physical possession of the car will continue to remain with the car owner or the loanee.
- The process of hypothecation is such that the Registration Card given by the RTO will contain a note indicating the hypothecation of one’s car in favour of the bank that the car owner has availed the loan from.
- The ownership of the car will therefore be vested with the bank till the loan amount is taken care of. Additionally, the insurance company will make a note of the loan on the policy document till the policyholder gets back the full ownership of his or her car.
- The implications of having one’s car hypothecated is that one cannot sell or transfer the ownership of the vehicle.
How to add hypothecation in car insurance policy?
Irrespective of the fact that the car that is being purchased is a new car or a second-hand car, the hypothecation details will be indicated in the policy document. While renewing the policy also, the clearance of the loan will be enquired into.
Documents required to do so
The following documents are to be submitted –
- Original Registration Certificate
- Valid car insurance policy
- Address proof of the car owner
- Pollution Under Control Certificate (PUCC)
- Form 34, which acts as the application for hypothecation
- Receipt of the fee paid for the endorsement of hypothecation by the RTO
- Attested copy of the car owner’s PAN card
How to remove hypothecation in car insurance?
It is essential that you get the hypothecation removed on time once your last car loan EMI has been paid up completely absolving you of any further liabilities.
Failure to do so will result in the bank or lender’s name is reflected in your car documents and records such as RC, car insurance policy, insurance company’s records, etc.
This will stop you from claiming full and clear ownership of your car. The manner in which one can remove hypothecation in car insurance is as follows –
- Cancellation of car hypothecation – this will be done when the loan is completely repaid. Repayment can be at the end of the loan tenure or one may choose to pre-close the loan. A No Objection Certificate (NOC) will be issued to that effect by the bank or the lender stating that the pending dues have been cleared off and a full and final settlement has been made.
- Documents required to do so – are mainly NOC, Form 35 (confirming closure of loan), valid insurance policy, and Pollution Under Control Certificate (PUCC).
- Submission of the application form – to the RTO to cancel the hypothecation with other requisite documents and RTO fees.
- Payment of fee – this amount varies from state to state and information regarding the same can be accessed on the transport department’s web portal.
How to check the status of hypothecation removal or cancellation?
One may access all the information needed on the Parivahan web portal and check his or her application status on it too. However, certain states may have a slightly different procedure – it is best to consult one’s local RTO to get more clarity.
Is it important to remove the hypothecation from the policy?
Yes, it is. Failure to do so will stop one from claiming full ownership of his or her car. Also, in case of an accident or total loss to your car, the insurance claim will be paid to the bank or the lender, as he or she will not be listed as the owner of the car.
The importance can be quickly summarised as follows –
- Selling the car would be impossible
- Ownership complexities especially while selling the car
- Issues while filing insurance claims of total loss
- Policy renewal can become complicated
What is the process to receive a smart car RC?
While terminating the hypothecation to the car, apply for a Smart Card RC by paying the prescribed fees. The RTO will issue an updated RC with your name as the owner of the car.
1. Can I buy a car that is still hypothecated?
To transfer the ownership of the vehicle which is hypothecated, a No Objection Certificate has to be obtained from the bank or lender, which clearly, in unequivocal terms states that the loan is paid in full. It is better to purchase a used vehicle that is not financed/ hypothecated.
2. How does the insurance claim work if the car is hypothecated?
The insurance claim amount will be paid to the bank or the lender as the ownership of the car will vest in their name.
3. Can the hypothecation removal process be done online?
One has to visit the respective RTO to get the hypothecation terminated. However, some states allow the concerned individual to initiate the cancellation through the Parivahan web portal. After applying online, one must visit the RTO to complete the cancellation procedure. A fee will be exacted by the RTO to complete this process.
Faithfully fulfilling your insurance obligations is one thing, but letting the concerned authorities know that it has been done is equally important.
Complete the ownership-related paperwork of your car only fulfilling your obligations and follow the due procedure to ensure that the ownership transfer goes on smoothly.
Be vigilant at all times and have a working knowledge of your rights and obligations.