Reasons That Make It Necessary to Remove Hypothecation in Your Car After Dues Are Cleared


Financing your car’s purchase can be done either by way of full and upfront payment of availing a lending facility. When you choose the latter option, the financial institution, be it a bank or NBFC, requires a collateral for financing such purchase. That’s when the car itself becomes a collateral for the lender and becomes security for the lender till the loan is repaid in full. It is necessary to have a legal record of such vehicle being a collateral to the lender in the vehicle’s registration documents and hence hypothecation is created on your car.

How does hypothecation work in 4-wheeler insurance?

When you purchase a car using financing option, the RTO records such car purchase made borrowings in the car’s registration certificate. The registration certificate of your vehicle indicates the owner’s name along with such details of hypothecation too. Similar to this process, the 4 wheeler insurance policy also indicates the name of the lender from whom you have availed the loan. While the ownership remains with the lender till all dues are cleared, any compensation for repairs is paid to the lending institution till such hypothecation is removed.

Is it essential to remove the hypothecation once the loan is repaid and why?

A simple answer to the burning question that you do need to remove the hypothecation of the vehicle is yes. Such hypothecation can only be removed when the entire amount of loan is paid off. Once when such dues are cleared, the financial institution issues a no-objection certificate i.e., NOC, which mentions no further amount is due towards the loan by the borrower, i.e., you.

It is necessary to remove such hypothecation once all amount is paid. The insurance company in its insurance policy as well as the RTO have recorded the borrowing for such vehicle. Thus, the lender being a legal owner of the vehicle, compensation for any damages to the vehicle are paid to such lending institution. Such compensation can be during an accident or even for case of total damage where the car cannot be repaired any further. Even if the car is stolen, the IDV is paid by the insurance company which eventually is paid to the lender in case the hypothecation isn’t removed. * Standard T&C Apply

How to remove the hypothecation of the car?

Clearing the hypothecation on your car’s insurance policy, whether you buy third party car insurance online or a comprehensive policy, is a simple four step process.

Step 1: The cancellation process begins only after the amount payable to the financial institution is cleared. Once all payments are through, the financial institution issues a NOC.

Step 2: Such NOC is used to delete such hypothecation with the registering RTO along with other documents like the registration certificate, PUC certificate, a valid car insurance policy and necessary forms as prescribed by the RTO.

Step 3: On submission of the required fees, the process of deleting the hypothecation begins. Once complete, a fresh registration certificate is issued.

Step 4: The newly issued registration certificate can be used to submit to your insurance company amending the insurance policy for removing the hypothecation.

* Standard T&C Apply

This is why it is essential to remove hypothecation and here’s how you can do it in just four simple steps. If you are removing the hypothecation during the renewal of your policy, you can also amend the general insurance plan for your car to incorporate necessary insurance coverage. Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms and conditions, please read sales brochure/policy wording carefully before concluding a sale.