What is Hypothecation in Car Insurance? Everything You Need to Know

However, before you make that crucial decision to finance your car purchase with a loan, navigating the intricacies of this financial arrangement is essential. Among the many technical terms you might encounter, one that often leaves borrowers puzzled is "hypothecation." You might have also encountered this term when buying a car insurance policy.

Hypothecation is frequently linked to car loans and holds considerable significance in the world of car financing and car insurance. To ensure that you make an informed choice and safeguard your interests, it is important to understand the concept of hypothecation, particularly in the context of car insurance.

This article sheds light on hypothecation in car insurance, providing a clear understanding of what it means and how it impacts your car ownership.

What is Hypothecation in Car Loan?

Hypothecation typically comes into play only in the case of a car loan. When you opt for a car loan from a bank or an NBFC, the financial institution approves the loan for the purpose of buying the car you have chosen. Despite being granted ownership, the car will effectively serve as collateral for the bank, which has provided the funds.

In simple terms, hypothecation is an act of offering your car as security when applying for a car loan. While you retain physical possession of the vehicle, the bank retains the status of hypothecation on your car until the loan is fully paid off.

As you must be aware, car insurance is mandatory in India. So, your car's registration certificate (RC) and your car insurance policy will both indicate the hypothecation.

Initially, when the car is registered with the Regional Transport Office (RTO), it is registered in the owner's name. However, if the car is purchased on a loan, the RTO will make a note in the Registration Certificate (RC) indicating that the car has been hypothecated by the respective bank/NBFC.

The car insurance provider will also mention the loan information in the policy documents until you, the policyholder, receive complete ownership of your car. It is essential to remember that vehicle hypothecation prevents you from selling or transferring your vehicle. You must have undisputed ownership of the vehicle in order to transfer it to another state or sell it.

How to Add Hypothecation to Your Car Insurance?

Adding hypothecation into your car insurance policy online is quite an easy process:

The procedure starts with the insurance provider officially acknowledging the car's hypothecation in the policy documentation. Subsequently, the insurer will pose specific questions to the policyholder. They will inquire whether the car was financed through self-funding or a bank loan. These same set of questions and procedures are reiterated during the online car policy renewal.

Typically, when you provide the Registration Certificate (RC) details to the insurer, they gain comprehensive insights into your car. The RC itself indicates the presence of hypothecation if the car was initially bought through a car loan. Similar inquiries may also be made when buying insurance for a pre-owned vehicle, be it car insurance for a second-hand car or bike insurance for a used motorcycle.

Which Documents are Required for Car Hypothecation Registration?

The following are the documents required when registering a hypothecated car with the Regional Transport Office (RTO):

• The application for hypothecation endorsement (Form 34)

• The original vehicle Registration Certificate (RC)

• An attested copy of the car owner's PAN card and address proof, such as an AADHAR card, passport, and voter ID

• The Pollution Under Control Certificate (PUCC)

• The last receipt for charges or fees paid at the time of the endorsement of hypothecation by the Regional Transport Office (RTO)

• Valid car insurance documents

It is necessary to have all these documents readily available when adding vehicle hypothecation to your car insurance policy.

How to Remove Hypothecation from Your Car Insurance Policy?

Removing hypothecation from your car insurance policy can be accomplished once you have fully settled your bank loan. This is an administrative procedure that involves coordination between the bank and the relevant Regional Transport Office (RTO). After securing a No Objection Certificate (NOC) from the bank, you can contact your insurance company via phone, email, or physical letter, attaching the NOC to request the cancellation or removal of hypothecation from your car insurance policy. Failure to remove hypothecation can delay the sale or transfer of car ownership.

Here's how you can remove hypothecation from your car insurance policy:

Step 1: Get an NOC from the Lender by Repaying the Loan

You can remove your car's hypothecation only once the car loan has been fully repaid. So, to initiate the removal process from the Registration Certificate (RC), first, ensure you clear the entire loan. The bank's records should indicate a zero balance against your car loan. Repayment can be made either at the end of the loan tenure or by pre-closing the loan. Once the payment is made, the bank or lender will issue a No Objection Certificate (NOC), confirming that you have settled your dues with the bank.

Step 2: Documents Required for the RTO

Upon repaying the vehicle loan, the bank will provide the following documents necessary for removing the hypothecation from your car. These documents are essential for the cancellation process:

1. No Objection Certificate (NOC): This document confirms the closure of the hypothecation agreement between the bank and the loan account holder. It is the primary document required by the RTO to remove the notation on the RC.

2. Form 35: This form serves as an application to the RTO for the removal of the hypothecation.

3. Valid Car Insurance Policy: You must submit a current car insurance policy to complete the hypothecation removal process.

4. Pollution Under Control Certificate (PUCC): The RTO mandates the PUC certificate as a prerequisite to cancel or remove the hypothecation from your vehicle.

Step 3: Submission of the Hypothecation Removal Application

After receiving the documents mentioned above from the lender or the bank, you need to visit the Regional Transport Office (RTO) to submit the documentation for hypothecation removal. Once all the required documents have been submitted, you should pay the stipulated RTO fees, and the RTO officer will initiate the removal procedure.

Step 4: Fee for Hypothecation Cancellation

To remove hypothecation on your car, you will be required to pay the applicable RTO fee. These fees can vary from one state to another. It is necessary to consult the respective RTO or the transport department's official website to determine the specific fee structure for your state. Upon payment of the fee and submission of the required documents, the RTO will proceed with the cancellation process.

Why is It Necessary to Remove the Hypothecation?

It is absolutely crucial to have the hypothecation removed, but this can only be accomplished when all outstanding payments owed to the bank/NBFC have been settled entirely. In other words, there should be no more pending dues. Once all necessary payments have been settled, the financial institution issues a No-Objection Certificate (NOC). This document confirms that the car owner no longer owes any further payments to the lender, and the hypothecation can then be removed.

The removal of hypothecation is of utmost importance because both your insurance provider and the registering Regional Transport Office (RTO) maintain a record of the loans taken out for the car. When you intend to sell your car, it is mandatory to clear any outstanding dues before transferring ownership, and this cannot be done until the hypothecation is removed. It is important to note that simply possessing the NOC from the lender does not grant you the authority to remove the hypothecation; you must report it to the RTO with the required forms and fees.

In the event of a total loss claim on your motor insurance policy, the claim proceeds will initially be directed to the lender, as they hold a charge against the outstanding dues, and any remaining amount will then be disbursed to you.

Furthermore, if you decide to change your insurer for improved coverage or better service during your car insurance renewal, you may have to follow complicated processes. Hence, it is highly advisable to remove the hypothecation as soon as you clear your car loan.

To conclude:

It is crucial to ensure that once the car loan is fully paid off, the hypothecation is removed. Furthermore, this adjustment must be reflected in the vehicle's Registration Certificate.

Moreover, it's advisable to verify all the information you have submitted meticulously and diligently and follow the prescribed procedures and timelines to avoid any potential issues in the future.

We are on Telegram! Join thousands of like-minded investors and our editors right now.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.