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.