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What Is Car Loan Hypothecation?

What Is Car Loan Hypothecation?

Applying for a vehicle loan? Know all about Car loan hypothecation before applying. It means you offer the car as security to the lender until you pay off the loan.

What is Hypothecation of Vehicle? 

If you’re wondering what is hypothecation of vehicle, it is a legal arrangement where your car is offered as security to the lender until your loan is fully repaid. In simple terms, the hypothecated vehicle meaning is that you can use and drive the car, but the lender has a legal claim over it until repayment is complete.

When a car becomes a hypothecated vehicle, the lender’s name is recorded on the Registration Certificate (RC) and insurance. This prevents the vehicle from being sold or transferred without the lender’s approval. The process is formalised through a hypothecation agreement, and nominal hypothecation charges may apply for registration and endorsement.

Once the loan is repaid, the hypothecation is removed, and the hypothecated vehicle becomes completely yours, free of any lender claims.

How Does Car Hypothecation Work?

Once the lender approves a car loan, the lender and the borrower sign a hypothecation deal that confirms that the car will back the loan.

The car’s papers are updated to show the lender’s stake. During the loan tenure, the borrower pays EMI on time. In case of non-payment, the lender can stake claim on the car. When the loan is paid off, the lender gives a No Objection Certificate (NOC) to the borrower. This lets the borrower update the car’s papers and claim the car.

Note –  your car’s insurance coverage will be in favour of the bank or financial institution, as they own the vehicle until you pay off the loan.

Benefits of Car Loan Hypothecation

Car loan hypothecation has benefits for both – the people borrowing money and banks lending it.

Borrowers benefit from:

Lower Interest Rates: Car loan hypothecation often leads to lower interest rates compared to unsecured loans because the vehicle serves as a collateral. This cuts down the overall cost to borrow money.

Higher Loan Amount: Being a secured loan, borrowers can get higher loan amounts than what they may qualify for with an unsecured loan.

Flexible Repayment Terms: Car loan hypothecation can offer more flexible repayment terms. Borrowers can pick a loan period that fits their financial plan.

For Lenders

Lower Risk: The car acts as collateral cutting down risk for lenders. If the borrower fails to pay, the lender can take back the car.

Higher Loan Approval Chances: Since an asset backs the loan, lenders tend to say yes more often even to people without perfect credit scores, which grows their customer pool.

Chance for More Interest Income: With less risk, lenders can offer good loans while still making money. The asset’s security can also lead to more cash from extra services and fees.

Car Loan Hypothecation Charges in India

When considering a car loan, it’s crucial to be aware of the various charges associated with hypothecation. These charges may vary from lender to lender but generally include:

  1. Loan Processing Fees: Upto 2% of loan amount + applicable GST
  2. Stamp Duty: At actuals as per State Stamp Duty Act + applicable GST
  3. Registration Certificate (RC) Collection Fees: ₹ 600 + applicable GST
  4. Loan documentation charges: ₹ 500 + applicable GST
  5. Valuation Charges (For Used Car): ₹ 800* + applicable GST

How to Remove Hypothecation from a Vehicle in India

Here’s the way you can remove car hypothecation:

Paying Back the Loan: To get the hypothecation off your car, you need to pay back all the money you borrowed, plus any interest and fees. After you’ve made all your EMIs, you should ask your lender for a No Objection Certificate (NOC). Most banks will mail this to you or let you download it from their website.

Updating Registration Certificate (RC): Once you get the NOC, give copies to the RTO where your car is registered. The RTO will check the papers and update the RC.

Telling Insurance Company: Let your insurance company know you’ve paid off your car loan. Give them a copy of the NOC from your lender so they can update their files.

Documents Required for Hypothecation Removal from RC

Once your car loan is fully repaid, removing hypothecation from your RC is essential to become the sole legal owner of your vehicle. Understanding what is hypothecation of vehicle and the hypothecated vehicle meaning helps streamline this process. To ensure smooth processing at the RTO, keep these documents ready:

  • No Objection Certificate (NOC): Issued by your bank for the hypothecated vehicle.
  • Form 35: Official application for hypothecation removal.
  • Original Registration Certificate (RC): Shows the car is hypothecated.
  • Valid Car Insurance Copy: Updated and active policy.
  • PUC Certificate: Pollution Under Control certificate for the vehicle.

Hypothecated Vehicle Meaning & Impact on Ownership Transfer

A hypothecated vehicle is one that is financed through a loan, where the lender holds the title as collateral until the loan is fully repaid. While you can use and drive the vehicle, the lender retains certain rights over it. 

This status directly impacts ownership transfer. You see, you cannot legally sell or transfer a hypothecated vehicle without obtaining a ‘No Objection Certificate (NOC) from the lender. Once the loan is cleared and the hypothecation is removed, you gain full ownership rights, making the vehicle eligible for smooth transfer or resale, free from lender restrictions.

How Hypothecation Affects Car Insurance 

When you finance a car through a loan, it becomes a hypothecated vehicle, meaning the lender holds the ownership rights until the loan is repaid. This affects car insurance, as insurance policies for a hypothecated vehicle often need to list the lender as the first beneficiary. 

Any claim settlement will involve the lender, ensuring the loan amount is covered first. Maintaining comprehensive insurance for a hypothecated vehicle is crucial to protect both you and the lender throughout the loan tenure.

Conclusion

Understanding and managing car loan hypothecation is essential for ensuring that you get the best loan terms and that both parties fulfil their obligations effectively.To explore car loan options that suit your needs, visit the Tata Capital App. Our offerings include competitive interest rates and personalised solutions for used car financing. With a thorough understanding of car loan hypothecation, you can confidently get around the car financing process and make informed decisions.

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FAQs

What is hypothecation?

 

Hypothecation is a process where a borrower pledges an asset, like a car, as collateral to secure a loan. This is done while retaining ownership, until the loan is fully repaid.

What is a hypothecated vehicle?

 

A hypothecated vehicle is a car bought on loan where the lender holds ownership rights until the loan is fully repaid. The borrower can use and drive the vehicle.

What are hypothecation charges in car loans?

 

Hypothecation charges in car loans are fees levied for creating a lien on your vehicle. They typically include loan processing fees, stamp duty, RC collection, documentation, and valuation charges, varying by lender.

Is hypothecation removal mandatory after car loan repayment?

 

Yes, hypothecation removal is necessary after repaying your car loan. It transfers full ownership from the lender to you, allowing you to freely sell or modify your vehicle without restrictions.

How do I remove hypothecation from vehicle RC in India?

 

To remove hypothecation from your vehicle RC in India, first repay your loan fully and obtain a No Objection Certificate (NOC) from the lender. Submit this NOC to the RTO to update the RC and inform your insurance company.

Will my insurance change after hypothecation removal?

 

Once hypothecation is removed, your car is fully in your name, and you can update your insurance policy accordingly. Premiums may remain the same, but the lender no longer needs to be listed.

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