Hypothecation in Car Insurance — All You Need to Know

Whether you are buying a new or used car, you have a few different methods of paying for it. You can either pay off the full value of the vehicle right away or you can avail a bank loan. Since the bank is contributing in paying a part of the value of the vehicle, the car is collateral for the bank. In other words, the car becomes surety or guarantee until the full loan amount is paid off. Hence, until the loan is paid off in full, the car’s ownership remains with the bank. When you pledge the car to obtain a loan, the practice is called ‘Hypothecation’. But, how does the car insurance work when the title of the vehicle is still with the bank until the loan is paid in full? Read on to learn about hypothecation in car insurance.

Let’s understand about hypothecated vehicle meaning in the section below:

When you buy a car through a bank loan, the vehicle is registered at the local Regional Transport Office (RTO) in your name. Also, the Registration Certificate (RC) will bear your name despite being financed by the bank. However, the RTO will note the hypothecation of your car in the RC, stating the car is in favour of the respective bank. Just like this process, the hypothecation in car insurance policy will be in favour of the respective bank that you have availed the loan from. The ownership of the car will remain with the bank until the total amount is paid off. The insurance company will make note of the loan on the insurance policy document until the time you have full ownership of the car.

Whether you are buying a new or a second-hand car on a bank loan, the insurance company will include the information in the policy document that the vehicle is hypothecated. Even while renewing the policy with a different insurance company, you will be asked if the vehicle is under a loan or if it has been purchased without a loan. Insurance companies also ask the RC of the vehicle before insuring, which provides details of the hypothecation.

If you want to purchase the car through a bank loan, the RTO will include the information of hypothecation in the RC. While registering the vehicle, which is hypothecated through a bank, below is the set of documents that need to be submitted:

You can remove hypothecation from your car title once you have paid the bank loan in full. This is an administrative process which involves the bank and the respective RTO. Once you obtain the NOC from the bank, you can call or write to your insurance company attaching the NOC to cancel/delete it on your car insurance policy. 

Without removing the hypothecation, you cannot sell or transfer the ownership of the vehicle. If your car is hypothecated and you are not sure what comes next, then this guide will help you understand the process of removing or cancelling it:

The hypothecation on your car can be removed only upon the repayment of the car loan. To start the process of removal from RC, you need to repay the loan completely. The bank’s records should reflect that there is no balance against the loan that you have availed. Repayment can be at the end of the loan tenure or you may pre-close the loan. Once the process of payment is completed, the bank or the lender will issue a No Objection Certificate (NOC) stating that you have paid the dues in full to the bank.

Upon the repayment of the vehicle loan, the bank will issue the below documents to remove the hypothecation from your car. These are the documents required for cancellation:

Upon receiving the above mentioned documents from the lender or the bank, you need to visit the respective RTO to submit the documents to cancel the hypothecation. Once you have submitted all the required documents, pay the prescribed RTO fees and the officer will initiate the procedure of removal.

You need to pay the RTO fee for cancellation of the hypothecation on your vehicle. The fees vary between states in the country. You need to visit the respective RTO or the transport department’s web portal to know the prescribed fee for the respective state. Once you pay the fee and submit the required documents, the RTO will cancel it.

The cancellation procedure differs between states and you need to check the respective RTO to understand how you can check the status of hypothecation termination. However, for most states where you can avail services through the Parivahan web portal, a national transport service portal, you can visit the page where you can check the status of your application. 

While terminating the hypothecation on your car, the RTO will issue a new RC. You can apply for a Smart Card RC by paying the prescribed fees. The RTO will issue the new RC Smart Card within the stipulated time frame. Ensure you get the revised or updated RC to make sure the title of the car is in your name and not hypothecated to the lender or the bank.

Yes, it is important to terminate or remove hypothecation of a car if the loan has been paid in full to the lender. Once you have paid off the loan amount, ensure you procure the NOC from the bank stating that there is a nil balance or no balance of your loan. However, the NOC is not the end of the procedure. Also, note that the NOC is valid for 3 months from the issuance date. You need to get it terminated with the respective RTO. Submit the required documents to the RTO and the transport department will remove it and transfer the full title to the car owner. This ensures you are the complete owner of the car.