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Your Guide to hypothecation in Car Insurance

While buying a new or a second-hand car, there are many different methods of paying for it. One can either pay off the full value of the vehicle immediately or also avail of a bank loan. When the latter option is chosen, the bank becomes a contributor in paying a part of the value of the vehicle, making the car their collateral. In other words, the car becomes a form of guarantee until the entire loan amount is paid off. Hence, until the payment is made in full, the car’s ownership remains with the bank. This act of pledging the car to take a loan is called ‘Hypothecation’.

Hypothecation of Car Insurance

When a car is bought through a bank loan, the vehicle is registered at the local Regional Transport Office (RTO) in the buyer’s name. The Registration Certificate (RC) will continue to bear the buyer’s name despite being financed by the bank. However, the RTO will make a note of the hypothecation of the car in the RC, and state it in favour of the respective bank, thereby enabling hypothecation of car insurance, in favour of the respective bank one has availed the loan from. Until the entire loan is paid off, the ownership of the car will remain with the bank.

Adding Hypothecation to a Car Policy

Whether one is buying a new or a second-hand car on a bank loan, the insurance company will include the information about the vehicle hypothecation in the policy document. Even if the policy is renewed with a different insurance company, the buyer will be asked whether the vehicle has been purchased under a loan or without one. Insurance companies also ask the RC of the vehicle before proceeding with the rest of the formalities. This document also provides details of the hypothecation.

Documents Required for Vehicle Hypothecation

Since the RTO will include the information of hypothecation in the RC in case the car is purchased through a loan, there are a set of documents that need to be submitted while registering the vehicle. These are mentioned in the list below:

● Original Registration Certificate.

● Form 34. This form acts as an application for hypothecation.

● Car insurance that is valid

● The car owner’s address proof.

● Pollution Under Control Certificate (PUCC).

● A receipt of the RTO’S endorsement of hypothecation fee paid

● An attested copy of the car buyer’s PAN card.

Once a full loan amount has been paid, it is extremely important to terminate or remove the hypothecation of a car. Upon loan settlement, one must ensure to procure the NOC from the bank stating that there is a zero balance or no balance of the loan remaining. The NOC doesn’t mark the end of the procedure, one must also get it terminated with the respective RTO. Only when the transport department removes it and transfers the full title to the car, means that the buyer of the car has finally become the owner in the eyes of law.

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