Hypothecation in Car Insurance and How to Remove it?

05 Sep 2021

Car Insurance Article


Today, buying a car is very much within the reach of salaried class and professionals. Easy availability of loans and higher disposable income are two major factors that have made cars affordable. A buyer paying the full showroom price at the time of car purchase is a rarity. More often than not, buyers make only a small down payment and the balance cost is met through a bank loan. The concept of hypothecation status comes up in case a loan is taken to purchase the car.

Hypothecation – What Does it Mean?

To understand what hypothecation is, you need to grasp the fact that it arises only if you have taken a loan to buy your car. Say, you are buying a car and to finance it you have approached the bank for a car loan. The bank sanctions the loan for purchasing the car. Though you get its ownership, the car would remain a collateral to the bank which has lent you the money. In other words, hypothecation in car insurance implies pledging the car when applying for a car loan. While you would have its physical possession, the bank will continue to hold hypothecation status on your vehicle until the loan is paid in full.

Hypothecation & Insurance

The Motor Vehicles Act of 1988 mandates buying a car insurance policy for every car that you purchase. It is compulsory to buy at least a third-party liability insurance policy for every car you own, With respect to hypothecation status in insurance policies, when you apply for an insurance policy for the car that is financed through a loan, your policy document will carry a note of it. This note will imply that while the car is registered under your name in your jurisdiction’s RTO, the hypothecation in car insurance is made in the bank’s favour.

Legal Compliance in Hypothecation

The registration certificate issued by the Regional Transport Office (RTO) of your jurisdiction will contain information about the hypothecation status of your vehicle as well. While registering your car, which is hypothecated by the bank, the following set of documents will be required for submission:

  • Form 34, which would act as an application form for hypothecation
  • Original registration certificate
  • Existing car insurance policy papers
  • PUC or pollution under control certificate
  • Your address proof, which can be your Aadhaar card, ration card, electricity bill etc.
  • An attested copy of your PAN card
  • A receipt of the fee paid for the endorsement of the hypothecation status by the Regional Transport Office or RTO

Removal of Hypothecation

It is only natural that once this loan has been paid off in full, the hypothecation status in insurance will cease to exist. To know how to remove hypothecation is extremely important because of:

  • Ownership complexities
  • Extra scrutiny when applying for renewal of insurance policy
  • Issues while trying to sell of the car
  • Issues when claiming insurance due to a natural or man-made disasters

Process of Hypothecation Removal

The following points will help you know how to remove hypothecation

Step 1: The first and foremost requirement in removal of the hypothecation status is paying off the loan. Only when your car is debt-free, you can apply for the removal of hypothecation in car insurance.

Step 2: To validate that you have repaid your car loan in full, you must obtain a No Objection Certificate from your bank. You must also obtain Form 35 from your bank, which would serve as a hypothecation cancellation request form to the RTO.

Step 3: Submit the Form 35 and NOC to your RTO for initiating the process of cancellation of hypothecation on your vehicle.

Step 4: You would be required to pay a certain stipulated fee for this cancellation process, that must be submitted to the RTO. This fee will vary between states. Once you have paid the fee, the RTO will review your documents and complete the cancellation process.

In Conclusion

You may think that paying off your car loan should be the only thing on your to-do list. But please remember that after completing the car instalments, you need to also put in a request for cancelling the hypothecation status on your vehicle or else it could lead to complexities in case of insurance claim, selling off the car etc.

Disclaimer: For more details on risk factors, terms & conditions please read sales brochure carefully before concluding a sale. *The discount amount will vary subject to vehicle specification and place of registration

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