What Is Hypothecation? A Simple Guide For Beginners

by Mahindra Finance

July 4, 2024

5 mins read

Introduction

Ever thought what is hypothecation and why it is essential for securing a loan? Hypothecation refers to the practice of pledging an asset as collateral for a loan without transferring ownership rights. It's a common practice, especially in loans against vehicles.

When you take out a loan to purchase a vehicle, such as a car or a motorcycle, the lender may require hypothecation of the vehicle. This means that while you are the registered owner and can use the vehicle, the lender has a legal interest in it until the loan is repaid.

In this guide, we'll understand what is hypothecation and provide a step-by-step process for adding or removing it from your RC book. We'll also explore loan against vehicle interest rate, loan against car eligibility criteria, and loan against car calculator to help you plan your finances.

What is Hypothecation?

Hypothecation is the process of pledging the ownership of your vehicle to the lender when taking a loan against it. Once you secure a vehicle loan, the hypothecation request is submitted to the regional transport officer along with all relevant details. While the ownership of the vehicle remains with the lender, your name and address are still mentioned in the RC book.

To add hypothecation to your RC book, you need to submit identity and address proofs along with the loan details. Reputed lenders make this process easier for borrowers. Additionally, when adding hypothecation to an insurance policy, your insurance provider will automatically collect information from your RC book.

Removing hypothecation

Once you have completely repaid your vehicle loan, it's essential to remove the hypothecation from your RC book. To remove hypothecation, follow these steps:

Obtain a No Objection Certificate (NOC) from the lender: Ensure that all outstanding dues are paid and request an NOC from the lender.
Apply to the Regional Transport Office (RTO): Fill out Form 35, which is the official application form for cancelling the hypothecation. Along with the NOC, submit a valid insurance policy and a Pollution Under Control Certificate (PUCC). Pay the required fee and submit the application to the RTO.
Check hypothecation status: After submitting your application, you can check its status on the Parivahan web portal. Once processed, you will receive an updated RC book without hypothecation mentioned.

Why comparing a loan against car interest rate is important

When taking a loan against your vehicle, it's important to consider the loan against car interest rate offered by different financial institutions. These rates vary depending on several factors, such as your credit score, loan amount, and tenure.

For example, let's say you want to avail of a loan against your car valued at ₹5 lakhs. You approach two lenders - Bank A and Bank B - and they offer different interest rates. Bank A offers an interest rate of 8% per annum, while Bank B offers 9.5% per annum.

By comparing the interest rates and associated terms and conditions, you can choose the lender that best suits your financial requirements.

Loan against car - eligibility

To be eligible for a loan against your car, you need to fulfil certain criteria set by financial institutions. Here are some common loans against car eligibility factors:

Vehicle age: Most lenders have a maximum vehicle age limit, typically ranging from 5 to 10 years.
Vehicle condition: The car should be in good working condition and free from any major damages.
Ownership documents: You must possess all necessary ownership documents, including the RC book and insurance papers.
Loan-to-value ratio (LTV): Lenders generally offer loans up to a certain percentage of the car's market value, such as 60% to 80%.
Income proof: You may need to provide income proof or bank statements to demonstrate your ability to repay the loan.

How to use loan against car calculator

Before finalising a loan against car offer, it's essential to assess its impact on your finances. One way to do this is by using a loan against car calculator. This online tool helps you estimate your Equated Monthly Instalment (EMI).

To use loan against car calculator, you need to enter your principal amount, interest rate and tenure. Then, click to calculate and discover your estimated Equated Monthly Instalment (EMI) payable.

Let's consider an example: You want to take a loan against your car valued at ₹7 lakhs with a tenure of 5 years (60 months). Using a loan against car calculator with an interest rate of 10%, you can calculate your monthly EMI. In this scenario, assuming no processing fees or other charges:

EMI = ₹14,798

Conclusion

Hypothecation is the process of pledging your vehicle as collateral for a loan. By understanding what is hypothecation, the steps involved in removing and adding hypothecation and being aware of loan against vehicle interest rates and eligibility criteria, you can make informed decisions about financing your vehicle purchase. If you're considering a loan against vehicle, Mahindra Finance offers competitive interest rates and flexible repayment options. Our expert team is always ready to assist you with the loan application process and ensure a seamless experience. Get your dream car today with Mahindra Finance!

FAQs

1) Can I take a loan against vehicle if it's not fully paid off?

Most lenders require that your vehicle is free from any existing loans or hypothecation before approving a new loan against it. However, some lenders may offer refinancing options if you still have an outstanding balance on your current loan.

2) What happens if I default on my loan against my vehicle?

If you default on your loan payments, the lender has the right to seize your vehicle as per the terms and conditions mentioned in the loan agreement.

3) Can I use the loan against my vehicle for any purpose?

Yes, you can use the funds from your loan against your vehicle for various purposes, such as starting a business, home renovation, education expenses, or even debt consolidation.