What Is Hypothecation In Car Insurance?

Hypothecation may sound complicated and a bit of a tongue twister as well but it is really quite a simple concept and one that you are most likely familiar with if you have taken a car loan to purchase your desired car.

To give you a better understanding of this term used in car insurance, we devote today’s article to explain to you the concept of hypothecation and the important aspects that you need to know about hypothecation with respect to car insurance.

Hypothecation in Car Insurance Explained

It is in rare cases that a buyer makes a full upfront payment to purchase a major high value asset such as a car, the cost of which runs into many lakhs of rupees. Most people whether salaried, self-employed or having a business of their own will usually approach a bank to apply for a car loan.

A car loan allows you the dual benefit of owning and using your own car while at the same time easing out your financial burden into manageable monthly instalments or EMIs. Actually when you go in for a car loan, you don’t fully own your car. Here is where the concept of hypothecation comes in.      

Hypothecation means that the asset, against which you have taken the loan i.e. your car, will be pledged to the lender i.e. the bank that has sanctioned your car loan. It is a security measure taken by the bank where your car is pledged as a collateral security to the bank till such time as you repay the car loan in full. In case you default on your EMI payments, hypothecation gives the bank the authority to seize and take possession of your car. Hypothecation also ensures that you do not sell the car to another party until you have repaid your car loan. Hence during the period when there is an active car loan in your name, your car remains hypothecated to the lender which could be a bank or NBFC from whom you have taken a car loan.

Points to Note about Hypothecation

• The Registration Certificate (RC) that you receive from the Regional Transport Office (RTO) when getting a newly purchased car registered in your name, will carry a note stating that the car is hypothecated in favour of the bank which has given the car loan.
• Your car insurance policy will also be in favour of the bank which has sanctioned your car loan.
• Once your car loan is fully paid up you need to take a couple of important steps to get the hypothecation removed.

• Obtain an NOC (No Objection Certificate) and Form 35 from the lending bank and submit it to the car insurance company.
• The insurance company will revise their records and change the car insurance to reflect your name as the owner. This removes hypothecation from your car insurance.
• Next submit the bank NOC along with the updated car insurance papers to the RTO where you got your car registered and get the hypothecation cancelled from the Registration Certificate.      
• You will be issued a fresh RC and then you can be confident that you truly own your car.

Importance of Removing Hypothecation

It is crucial that you remember and get the hypothecation removed on time once your last car loan EMI is paid up and your car loan is completely repaid. Failure to do so will continue to reflect the bank or lender’s name instead of your name in all your car documents and records such as RC and RTO and in your car insurance policy and the insurance company’s records. So you will not be able to claim full and clear ownership of your car. 

Note that buying car insurance is as important and necessary a step when buying a car as it is to get a car loan hypothecation removed for total ownership. As per the Indian Motor Vehicles Act, it is compulsory for every car owner to have at least third-party car insurance.

Driving without car insurance is a legal offence for which you could face severe penalties. It also exposes your car to all kinds of risks such as damage from an accident, natural disasters, fire, loss from theft, as well as injury to a third-party and damage to their vehicle and property.

To avoid such risks that could prove very heavy on your pocket in terms of financial and legal costs and liabilities, it is necessary to purchase car insurance coverage. You can go online to compare plans and purchase a car insurance plan online that meets your requirements. Although third-party car insurance is a basic requisite it may not provide adequate coverage. Hence buying comprehensive car insurance is recommended as it gives you wide ranging benefits and more robust coverage.