What is Car Loan hypothecation?

You are in the process of finalizing a car with a Car Loan, and suddenly the salesman springs the word ‘hypothecation’ on you. What does Car Loan hypothecation mean?

What is Car Loan “hypothecation”?

Hypothecation is the practice where you pledge an asset (in this case, a car) to a bank when applying for a loan. The bank keeps the car as collateral or security until you pay it off. 

Your bank technically “holds” your car during your loan’s tenure, though you physically have possession of it. 

What is the Car Loan hypothecation process? 

When you buy a car with a loan, your vehicle is registered at the Regional Transport Authority (RTO) with your name. The car’s Registration Certificate (RC) will also have your name.

But the RC will include a note that endorses the car in favour of the bank since it is technically the owner of the car till the loan is outstanding. 

The insurance cover, too, will be in favour of the bank.

The car, however, remains in your possession, and you are free to use it for personal or business needs. 

How do I remove the hypothecation from my car? 

You can remove the hypothecation from the car only after repaying the entire loan to the bank. 

After paying all the EMIs, ask your bank for a no objection certificate (NOC). This document will state that no dues are pending on the loan. The bank will send the NOC to you by post. HDFC Bank customers can also get the NOC on NetBanking.

Next, submit copies of the NOC to the RTO and the insurance company. 

Once the RTO verifies the document, they will update the RC document (book or smart card) with your name as the owner. The RTO will also place a stamp indicating that the hypothecation has been removed from your vehicle. 

Now the loan process is complete. The hypothecation is removed. And you are finally the complete owner of the car.

Looking to apply for a Car Loan? Click here to get started!

Read more on how you can use your car as a collateral here.

* Terms & conditions apply. Car Loan disbursal at sole discretion of HDFC Bank Ltd. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.