What is Car Loan Hypothecation?
When you take a car loan, your vehicle technically belongs to the bank or lender until the loan is fully paid off. This is because of a process called car loan hypothecation. It means the car is pledged as collateral, but you get to use it. In this blog, we explain what car loan hypothecation is, how it works, why it’s important, and how to remove it once your loan is cleared.
Key Takeaways
- Hypothecation means your car is pledged to the lender until full repayment
- The lender’s name appears on your RC (Registration Certificate)
- You must remove hypothecation after the loan is paid off
- Without removing it, you can’t sell or transfer the vehicle
- It’s a legal process under the Motor Vehicles Act
Table of Contents
- What Is Car Loan Hypothecation?
- Why Is Hypothecation Required?
- How Does Hypothecation Work in Practice?
- What Is Mentioned in the RC?
- How to Remove Hypothecation After Loan Repayment
- Documents Required for Hypothecation Removal
- What Happens If You Don’t Remove Hypothecation?
- Final Thoughts
- FAQs
What Is Car Loan Hypothecation?
Car loan hypothecation is a legal agreement between the borrower and the lender, where the car is used as collateral for the loan. The vehicle is in your name, but the lender has a right over it until you repay the full loan amount.
It’s governed by the Motor Vehicles Act and is registered with the Regional Transport Office (RTO).
Why Is Car Loan Hypothecation Required?
When you take a loan to buy a car, the bank or NBFC gives you the money but needs some security in return. That security is your car.
Hypothecation helps the lender:
- Repossess the car if you default on EMIs
- Ensure legal rights over the asset until full repayment
- Prevent the borrower from selling the car without clearance
In simple words: You can use the car, but the bank technically owns it until your loan ends.
How Does Car Loan Hypothecation Works?
Here’s how it usually works:
- You apply for a car loan and get it approved
- At the time of car registration, the lender’s name is added as the hypothecation holder in your RC (Registration Certificate)
- You pay your EMIs every month
- Once the loan is fully repaid, you get a loan closure letter or NOC (No Objection Certificate)
- You then need to submit this NOC to the RTO to remove the lender’s name from the RC
What Is Mentioned in the RC?
Your vehicle's RC will include:
- Owner’s name (your name)
- Vehicle details (make, model, registration number, chassis number, etc.)
- Hypothecation details: Name of the lender (bank/NBFC) and date of agreement
This shows the car is under a loan agreement.
Remove Car Loan Hypothecation After Loan Repayment
Once your loan is fully paid:
- The lender issues a No Objection Certificate (NOC)
- Visit the RTO where your vehicle is registered
- Submit the NOC along with other required documents
- The RTO removes the hypothecation from your RC
- You get a new RC or an updated smart card without the lender’s name
This process usually takes 7–15 working days, depending on your RTO.
Documents Required for Vehicle Loan Hypothecation Removal
- Original RC (Registration Certificate)
- NOC from the bank/NBFC
- Copy of loan closure letter (optional but helpful)
- Valid PUC certificate
- Insurance copy of the car
- Form 35 (issued by the lender)
- Address proof and ID proof
- RTO fee receipt (usually ₹100–₹500)
You can submit the documents in person or online (if your state RTO supports digital services).
What Happens If You Don’t Remove Hypothecation?
If you don’t remove hypothecation after loan repayment:
- Your car is still legally “owned” by the lender
- You can’t sell the car or transfer ownership
- Insurance claims may face delays
- It creates confusion in resale or legal verification
- You may face penalties during police checks or road tax renewal
That’s why removing hypothecation is an important last step after loan repayment.
Final Thoughts
Car loan hypothecation is a standard procedure in vehicle financing. It protects both the lender and the borrower by ensuring that loans are secure and properly documented. But once your loan is paid off, don’t forget to remove the hypothecation from your RC. It gives you full ownership of the car and avoids trouble in future transfers or claims. Always keep your documents safe and act promptly after the loan is closed.
FAQs
What is car loan hypothecation?
It means your car is pledged to the lender until you repay the full loan.
Is hypothecation the same as car ownership?
No. You are the registered owner, but the lender has a legal right over the vehicle.
How do I know if my car is under hypothecation?
Check your RC it will mention the bank/NBFC under the hypothecation section.
Can I sell a car with hypothecation?
No. You must clear the loan and remove hypothecation before selling.
What is Form 35 in car loan closure?
Form 35 is issued by the lender and is required to remove hypothecation at the RTO.
Is there a time limit to remove hypothecation?
There’s no strict limit, but it’s best to do it within 3 months of loan closure.
Can I do hypothecation removal online?
Yes, in some states. Check your state RTO’s website for online services.