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Whether you are buying a new car or investing in an old one, there are different options you have to make the payment. You can either pay the full amount or opt for a bank loan. Since the bank is helping you get the vehicle, the car is collateral for the bank and you will be charged an interest rate in exchange for the loan amount. The car will be a guarantee to the bank until the loan amount is fully paid. When you pledge your car to the bank until the loan amount is paid fully, the practice is called Hypothecation. What is necessary to understand is how does insurance work when the ownership of the car is still in the hands of the bank when you get a loan. 

Hypothecation in car insurance

When you buy a car through a bank loan, the car is registered on your name in the local RTO. Although, the registration certificate will bear your name even though it is financed by the bank. Hypothecation in car insurance will be in the favour despite bank you have availed the car loan from. The ownership of the car will remain to the bank unless the amount is fully paid off. The insurance company will have a note of this on the policy document until the loan is fully paid. 

How to add hypothecation to car policy?

Whether you are getting a new car or an old one on a bank loan, the insurance will keep a note of the same on the policy document. Even while renewing the policy you will be asked that if there is a car loan or the amount has been paid fully. 

Document required for car hypothecation

  • Original RC
  • Form 34
  • Valid Car insurance
  • Address proof of car owner
  • Pollution Certificate
  • Receipt of the fee paid for the endorsement of hypothecation by the RTO
  • ​Attested copy of PAN card

    How to remove hypothecation from a car insurance policy?

    Once the bank loan is fully paid, you can remove the hypothecation from your car. It is an administrative process involving bank and RTO. Once you get NOC from the bank, you can attach it to the motor insurance company and hypothecation will be removed. You will also need to take a certain document to RTO for cancellation of the same. After paying the fee one can proceed with the cancellation. 

    Is it essential to remove hypothecation?

    Yes, it is necessary to remove hypothecation if the car loan has been paid fully. You can procure a NOC from the bank on clearing the loan amount; this NOC will serve as the document for the clearance and cancellation of hypothecation. The cancellation is necessary to confirm that now you are the sole and complete owner of the car and bank has no right over it. 

    Receive Smart Card RC

    The RTO will generate a new RC on cancellation of hypothecation. You can apply for the smart card by paying a prescribed fee. The process can also be done when you renew car insurance. ​