May 18, 2023

You may wish to take out a loan to finance a large purchase, such as a new car or an apartment, etc. A loan is an efficient way to cover big expenses without having to worry about saving up for it over time. When you approach the bank for a loan, they may ask you to place any valuable asset as collateral. This collateral serves as a guarantee to the bank that you will repay the loan. In the event that you fail to repay the loan within the defined time frame, the bank can seize the asset - even if you have the legal ownership documents.

The same is true for cars. If you purchase a car taking a loan or credit, you pay a down payment and the loan covers the rest. This means that the party who paid the majority portion of the car’s price becomes the 'hypothetical owner'. Essentially, the bank or lending party that issued the loan to purchase the car becomes the hypothetical owner until the loan is repaid and this process is known as hypothecation. This hypothecation must be mentioned on your registration certificate and insurance policy.

However, what happens if you repay the loan? Do you remove the hypothecation? Let’s find out.

What Is Hypothecation In Car Insurance?

As mentioned earlier, when you buy a car by taking a loan from any bank or any lending party, they become the hypothetical owner of the car till you pay back the entire loan amount. This process is called hypothecation. In order to give you a loan, the bank or lender holds your car as collateral.

The details of your financier need to be mentioned in your registration copy/Mulkiya as well as your car insurance policy copy. When a loan is taken on a new car, the dealer will not release the car from the showroom until and unless the financer/loan details are printed on the policy copy.

How Are The Financier Details Added To The Registration Copy/Mulkiya?

1. When you purchase a car, whether new or used, you must register it with the Road and Transport Authority (RTA).

2. You will need to provide your financier's details during this process.

3. After that, you can provide the loan approval documents to the RTA and get the financier's name printed on the registration copy/Mulkiya.

How To Add The Financier Details To Your Insurance Policy Copy?

Once you have added the financier details to your registration copy/Mulkiya, they can also be added to your insurance policy copy by informing your insurer. As mentioned earlier, your vehicle dealer will not release your car from the showroom until the hypothecation details are added to your policy copy.

How To Remove Hypothecation From Your Registration Copy And Insurance Policy?

Once you have repaid the loan amount to the bank or your loan provider, the hypothecation can be removed from your registration copy and your policy copy.

In order to do so, follow these steps -

1. First, you will need to obtain a Nil Liability Certificate from your loan provider once the loan is fully repaid. The Nil Liability Letter is a confirmation letter stating that you have paid off the entire loan amount and are not liable for any further payments.

2. Once you get this letter, you can share the same with the RTA and get the hypothecation removed from the registration copy/Mulkiya.

3. Then, contact your insurance company and ask them to remove the hypothecation information from your insurance policy as well. Share your updated registration copy/Mulkiya with the insurance company.

4. After verifying your information, they will remove the hypothecation from the insurance copy and send you the updated policy copy within 24 working hours.

What Happens If There Is A Total Loss Or Theft And Your Loan Is Still Going On?

Say you have a loan on your car and your car goes for a total loss or theft. If you want the claim amount from your insurer, you need to follow these steps -

1. First, you will need to pay the entire loan amount to the loan provider and get a Nil Liability Certificate.

2. After obtaining the Nil Liability Certificate, you need to visit the RTA to remove the loan information from your registration copy or Mulkiya.

3. When this is done, you can contact the insurer and initiate the claim request. In the event of theft or an accident resulting in a total loss, you should notify the police and obtain the police report right away, as the police report is necessary for the claim process.

Alternatively, you can also authorise direct claim settlement to the loan account number if you don’t want it. The vehicle will be deregistered from your name and transferred to the company's name.

Wrapping up!

When your car loan is paid off, make sure you follow the proper procedures to remove the hypothecation from your vehicle's registration certificate as well as your car insurance policy. This way, you will no longer be tethered to a loan and will be able to enjoy full ownership of your vehicle. You will also be able to go through a hassle-free claim process if it ever arises.