Hypothecation in Car Insurance: What is it & How to Get it Removed?

Car purchase can be financed either by way of full-and-upfront payment or by availing a loan through a lending facility. When you choose the latter alternative, the financial institution requires a collateral for financing such purchase. Thus, the car itself is treated as a collateral for the lender and becomes security till the loan is repaid in full. To record such financing of your car through the lender, the registering Regional Transport Office (RTO) acknowledges it by way of creating a hypothecation in your car’s registration certificate.

How does hypothecation in car insurance work?

When you buy a car using loan facility, the RTO records the funding such car purchase in the registration certificate. Thus, the registration certificate indicates the owner’s name along with such details of hypothecation which is created in favour of the lending institution. Similar to the process of creating hypothecation in favor of the lending institution, the car insurance policy also has its mention. Since the lender pays a substantial amount to finance the purchase, compensation for repairs is paid to such lender, be it a bank or NBFC, till such hypothecation is deleted.

Is it vital to delete the hypothecation and why?

Yes, it is essential you remove the hypothecation created in favour of the lender. However, the hypothecation can only be removed when all dues payable to the financial institution is paid in full, i.e., no more dues are pending. Once you have made all the necessary payments, the financial institution issues a no-objection certificate (NOC). This NOC indicates that no further dues are receivable from the lender from the owner of the car and the hypothecation can be deleted. Removing the hypothecation is essential since the insurer as well as the registering RTO will have a record of such borrowings made for the vehicle. While selling your car, you need to clear any and all dues payable and hence are not permitted to transfer the ownership till such hypothecation is removed. Further, mere possession of the NOC from the lender does not enable you to delete the hypothecation. You need to report it to the RTO with necessary forms and fees. When a claim for total loss is made in your motor insurance policy, the claim will first be paid to lender since they have a charge towards the dues and then any balance amount shall be paid to you. Moreover, there may be extra scrutiny in case you are changing your insurer for better coverage during car insurance renewal. Hence, it is best you remove such hypothecation once the loan balance is zero.

How to remove the hypothecation in car insurance?

Deleting hypothecation in your car’s insurance policy, be it a third-party plan or a comprehensive policy, is a simple four step process.

Step 1:

The cancellation process can be begun only when the any amount of loan payable becomes zero. That’s when you apply for an NOC from the lender.

Step 2:

You need to furnish such NOC provided by the lender with other documents like the registration certificate, PUC certificate, valid car insurance policy and other necessary forms as prescribed by the RTO.

Step 3:

Once you pay the required fees for the process, the removal of hypothecation is taken on record and a fresh registration certificate is issued. This new registration certificate now only has your name as the owner without any mention of lien.

Step 4:

The amended registration certificate now can be used to submit to your insurer thereby amending the insurance policy for removing the hypothecation. This can either be done at renewal or by way of an endorsement. 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.