Has the vehicle population increased in India? Without a doubt, it has. Why and how has it increased, you may be wondering. Well, a couple of years ago, not everyone could afford a motor vehicle, whether a car or a bike. Today, financial services and banks cater to these needs almost instantly. Hence, one can easily buy a bike or a car today with the help of a bike/car loan. Moreover, working people can easily contribute a tiny bit of their monthly salary to pay the vehicle’s EMI. These EMI purchases also give rise to another factor: the hypothecation process. But what is hypothecation, and how does it work? Let us understand this term in detail.
What is Hypothecation?
Hypothecation is a financial term used to describe the practice of pledging an item as collateral for a loan without transferring the title or control of the asset to the lender. In this arrangement, the borrower keeps the title and the right to use the item, but the lender has a security interest in it. If the borrower does not repay the loan amount, the lender may seize and sell the hypothecated asset to recoup the unpaid balance.
How Does Vehicle Hypothecation Work?
Vehicle hypothecation is the act of pledging a vehicle as collateral to obtain a loan, usually an auto loan, but not transferring ownership or control of the vehicle to the lender. Here is a full explanation of how vehicle hypothecation works:
- Loan Agreement between two parties.
- The purchase of the vehicle is done through the loan amount.
- The vehicle is registered with the mentioned Hypothecation.
- Retention of ownership and the possession of the vehicle takes place.
- The loan repayment happens in the form of EMIs each month to the lender by the owner of the vehicle.
- On completely paying the loan amount, hypothecation termination needs to be done by the vehicle owner.
Main Characteristics of Hypothecation Termination
The primary features of Hypothecation are:
- The borrower maintains ownership and the ability to utilize the asset.
- The borrower normally retains physical custody of the assets.
- Commonly hypothecated assets include real estate, automobiles, stocks, and bonds.
- If the borrower fails to pay, the lender has a legal claim to the asset.
- The vehicle acts as collateral for the provided loan amount.
Now let us understand hypothecation termination.
What is Hypothecation Termination at the RTO?
Hypothecation termination at the Regional Transport Office (RTO) is the process of eliminating a lender’s lien or Hypothecation on a vehicle once the debt secured by it has been fully repaid. When a car is acquired with a loan, the lender (typically a bank or financial institution) establishes a lien on the vehicle, which is documented on the registration certificate (RC). Once the loan is repaid, the Hypothecation must be ended to amend the RC and indicate that the vehicle is free of any encumbrances.
How to Terminate Your Hypothecation at the Nearest RTO
The steps to terminate your Hypothecation are simple and easy, and they are:
- Once the loan has been repaid, the lender will provide an NOC and Form 35 necessary for the hypothecation termination procedure.
- Collect the necessary documents, such as the original RC, NOC, Form 35, Valid insurance certificate, Identity and address proof of the owner, PUCC, Application for hypothecation termination, RTO-specific forms and fee receipt, and more.
- Submit the documents to the RTO where the vehicle is registered. Fill out any additional forms required by the RTO.
- There may be a nominal fee for the hypothecation termination.
- The RTO will verify the submitted documents. Once verified, the RTO would process the termination and update the vehicle’s records.
- The RTO will issue an updated RC.
Why is It Important to Terminate Hypothecation?
- Clear Ownership: It formally eliminates the lender’s claim on the motor vehicle, granting the owner entire ownership.
- Ease of Sale: It is easier to sell the automobile since potential buyers prefer vehicles that are not hypothecated.
- Legal Compliance: Ensures the vehicle’s registration information is correct and up to date.
By completing the hypothecation termination process at the RTO, the car owner assures that the lien is formally erased from the registration, indicating clean possession.
Other Forms of Hypothecation
Mortgage Loans: In a mortgage, the property or land is hypothecated to the lender or financial institute. The homeowner retains possession of the home while the mortgage is outstanding.
Securities-Based Lending: Investors can borrow against their securities portfolio investments, with the securities themselves serving as collateral to the loan.
How is Hypothecation Different from Pledge?
A hypothecation is when the borrower maintains possession and ownership of the asset.
A pledge is when the borrower hands up possession of the asset to the lender as collateral.
Terms of a Hypothecation
- Rights of Lender: The loan agreement and related laws outline the lender’s rights to the asset.
- Impact on Credit: The terms of the Hypothecation, as well as the borrower’s compliance with them, might have an impact on their credit rating.
- Default Consequences: If the borrower defaults, the lender may foreclose on the hypothecated asset to fulfill the loan.
Conclusion
If you purchased your vehicle through a loan, it is big time that you first get your RC book cleared from the Hypothecation if you are done paying the loan. This post must have helped you to understand Hypothecation, how it works, and why you need to know it well. We wish you safe and happy driving!
