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Hypothecation in Car Insurance: A Complete Guide

  • Author :
  • TATA AIG Team
  • Published on :
  • 22/10/2021

When you plan to buy a car, you make an effort to invest or save some money to purchase it. Or you can simply take a loan, buy the car of your choice and then repay the loans in easy instalments over the years. Since the car is registered in your name, you are the rightful owner of the vehicle. Even the motor insurance you buy to protect your car will have your name on it.

However, with a car loan, the bank or the lender also becomes a hypothetical owner of your car. Hence, during all the years of loan repayment, the lender also remains the car’s owner in a way, and your car gets a ‘hypothecation’ status.

Since a car insurance policy is an important part of the car hypothecation, you can and should avail of your four wheeler insurance online for a hassle-free purchase. Buying the policy online also means you can compare car insurance policies and choose premiums that do not burden your car loan repayments.

What is Car Hypothecation?

Your car insurance provider should be informed of every change or modification that is made to your car or is related to your vehicle so that these changes can be updated in your policy. While this information may not directly affect your policy coverage, it provides more clarity to the insurer about any potential risks the insured vehicle and the car owner may take on.

When it comes to the hypothecation in car insurance, the process is quite straightforward and needs you only to follow the correct process. The documents needed for the vehicle hypothecation are:

  • The car’s registration certificate
  • Proof of your residential address
  • Attested copy of your PAN card
  • Your valid four-wheeler insurance policy
  • The PUC or Pollution Under Control Certificate
  • Form 34 – also the hypothecation application
  • The fee receipt for RTO’s endorsement of the hypothecation

Once the Regional Transport Office (RTO) receives all of these documents and updates them to your RC, be sure to inform us about the hypothecation so that we can update your policy accordingly.

What is Hypothecation in Car Insurance?

When you purchase your car, the registration certificate of the car will have your name on it. As seen above, the Regional Transport Office (RTO) will also have a record of the same and will update the car hypothecation in the registration certificate. However, since the registration certificate has a bearing on the insurance of your car, your motor insurance will consider the lender as the owner of the car.

It means that even though you are the owner of the car, the vehicle has been financed by the bank, and so, the hypothecation in the car insurance policy will also be in the bank’s favour. This will render the bank as the owner of the car until you have completely paid off the loan.

When you buy a new car or a second-hand car through a bank loan, your Tata AIG car insurance policy will also accommodate this information. And if you choose to renew your existing car insurance policy of another insurer with us, you will need to share the details of the hypothecation through your registration certificate.

How to Remove Hypothecation from the Car Insurance Policy?

Once the car loan has been paid, it is advisable to remove the hypothecation status from your car title. Under usual circumstances, if your car is damaged, you can file a claim and receive the settlement amount from your insurer. However, in the case of hypothecation, if you do not complete the cancellation and your car faces accidental damage or total loss during this time period, the claim will be settled in favour of the lender.

The cancellation process may be quite intricate but should be followed properly so that you can successfully remove the hypothecation status.

These are the steps to be followed:

  • The bank’s/lender’s records should prove that there are no more outstanding payments to be made by you, after which they will also issue a NOC or No Objection Certification stating that all the dues have been settled.
  • Apart from the NOC from the lender, here are some other necessary documents for the hypothecation removal process.
  • Form 35 needs to be used for the cancellation application to the RTO. This form also confirms that you do not have any more loan repayments pending.
  • Your car insurance policy is another important document that needs to be present during the cancellation process.
  • The PUC certificate is also a must since the RTO needs this document to cancel and remove the hypothecation.
  • Once you have the NOC from the bank and the other documents in hand, submit the application at the RTO where your vehicle is registered.
  • After this, all you need to do is pay the necessary RTO fees, and the process will be initiated by an officer, and the hypothecation will be cancelled. You can find out the fee amount at the RTO or visit your state transport department’s online portal.

What Happens Once the Hypothecation is Removed?

When the car’s hypothecation is cancelled or terminated by the RTO, you will receive a new RC with the updated status. This Smart Card RC has to be issued by the RTO within a given timeframe. Once you get the updated RC, check if the title still has the bank’s name or only your name on it. The hypothecation cancellation process is important so that you become the sole owner of your car on paper. This will also have to be updated on the insurance policy accordingly.

The cancellation of the hypothecation will differ from state to state, and to understand the process more clearly, you should visit your Regional Transport Office. The Parivahan national transport web portal enables you to check the status of the cancellation online.

While there may be a lot of important documents to be submitted and processes to be followed, it is important that you do not leave the hypothecation removal process incomplete. At the end of the process, you must have the updated RC stating that you are the sole owner of the car. This status will also have to reflect on your car insurance policy, which is a much simpler process.

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