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What Is Car Loan Hypothecation?

What Is Car Loan Hypothecation?

Applying for a vehicle loan? Know all about Car loan hypothecation before applying. It means you offer the car as security to the lender until you pay off the loan.

Benefits of Car Loan Hypothecation

Car loan hypothecation has benefits for both – the people borrowing money and banks lending it.

Borrowers benefit from:

Lower Interest Rates: Car loan hypothecation often leads to lower interest rates compared to unsecured loans because the vehicle serves as a collateral. This cuts down the overall cost to borrow money.

Higher Loan Amount: Being a secured loan, borrowers can get higher loan amounts than what they may qualify for with an unsecured loan.

Flexible Repayment Terms: Car loan hypothecation can offer more flexible repayment terms. Borrowers can pick a loan period that fits their financial plan.

For Lenders

Lower Risk: The car acts as collateral cutting down risk for lenders. If the borrower fails to pay, the lender can take back the car.

Higher Loan Approval Chances: Since an asset backs the loan, lenders tend to say yes more often even to people without perfect credit scores, which grows their customer pool.

Chance for More Interest Income: With less risk, lenders can offer good loans while still making money. The asset’s security can also lead to more cash from extra services and fees.

How Car Loan Hypothecation Works

Once the lender approves a car loan, the lender and the borrower sign a hypothecation deal that confirms that the car will back the loan.

The car’s papers are updated to show the lender’s stake. During the loan tenure, the borrower pays EMI on time. In case of non-payment, the lender can stake claim on the car. When the loan is paid off, the lender gives a No Objection Certificate (NOC) to the borrower. This lets the borrower update the car’s papers and claim the car.

Note –  your car’s insurance coverage will be in favour of the bank or financial institution, as they own the vehicle until you pay off the loan.

Benefits of Car Loan Hypothecation

Asset Security: The main advantage of hypothecating your car is that it gives security to lenders. When you pledge an asset as collateral, banks can cut their risk and offer borrowers 2nd hand car loan interest rates that are lower.

Lower Interest Rates: Because hypothecation cuts lenders’ risk, they can give this benefit to customers through lower interest rates.

Flexible Loan Options: Car hypothecation gives borrowers the chance to pick from many repayment choices, like extended terms or customized EMIs.

Quick Processing: Hypothecated car loans have a smooth approval system. This helps a lot when buying a car from a dealer, as the loan can get processed fast.

How to Remove Hypothecation from Your Car

Here’s the way you can remove car hypothecation:

Paying Back the Loan: To get the hypothecation off your car, you need to pay back all the money you borrowed, plus any interest and fees. After you’ve made all your EMIs, you should ask your lender for a No Objection Certificate (NOC). Most banks will mail this to you or let you download it from their website.

Updating Registration Certificate (RC): Once you get the NOC, give copies to the RTO where your car is registered. The RTO will check the papers and update the RC.

Telling Insurance Company: Let your insurance company know you’ve paid off your car loan. Give them a copy of the NOC from your lender so they can update their files.

Car Loan Hypothecation Charges

When considering a car loan, it’s crucial to be aware of the various charges associated with hypothecation. These charges may vary from lender to lender but generally include:

  1. Loan Processing Fees: Upto 2% of loan amount + applicable GST
  2. Stamp Duty: At actuals as per State Stamp Duty Act + applicable GST
  3. Registration Certificate (RC) Collection Fees: ₹ 600 + applicable GST
  4. Loan documentation charges: ₹ 500 + applicable GST
  5. Valuation Charges (For Used Car): ₹ 800* + applicable GST

Conclusion

Understanding and managing car loan hypothecation is essential for ensuring that you get the best loan terms and that both parties fulfil their obligations effectively.

To explore car loan options that suit your needs, visit the Tata Capital App. Our offerings include competitive interest rates and personalised solutions for used car financing. With a thorough understanding of car loan hypothecation, you can confidently get around the car financing process and make informed decisions.

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