So you own a car under a car loan but now want to foreclose it ? There are some do’s and don’t you need to be aware of as far as car loans in India are concerned especially on how to remove hypothecation from RC after car loan termination.
Unlike a home loan where the process involves liaising with a the local bank to close down your loan, a car loan is complex as apart from the banks you also need to knock the door of the regional transport office (RTO). That is because when you bought the car on a loan, the vehicle was in the bank’s name as they paid the money to you to buy it out. Their name was endorsed on the registration certificate (RC). You will need to change this after the car loan is closed down.
Let us look at the specifics on how to remove hypothecation from RC after car loan termination.
Prepayment penalty for your car loan foreclosure
Like all loans, you need to be aware that there will be a prepayment penalty that banks will charge if you prefer to close down the car loan before the end of the loan tenure. Prepayment fee of 2% is what banks usually charge on the principal outstanding or the amount you want to prepay. Let us check with an example how this works out.
Suppose you have a Rs 5,00,000 loan taken in January 2012 at 10% rate of interest for a tenure of 5 years. You are now wishing to close this sooner rather than later and the prepayment penalty is 2%.
Using a car loan foreclosure calculator, you will note that you have already paid Rs 100,041 as interest and the principal outstanding is Rs 436,432. If you choose to close down the car loan now, you will have to pay a prepayment penalty of Rs 8,729. As long as you are happy to pay that, no issues.
Once you have decided, pay the outstanding loan amount along with the prepayment penalty and service tax. Note that you will need to get a receipt from the bank for the same.
How to remove hypothecation from RC after car loan termination
It is important to transfer ownership of the car from the bank’s name to your name. This process is called removal of hypothecation. The term hypothecation means that you offer an entity as a collateral for a debt that you want to take on. You, the debtor, usually do not have to turn over physical custody of the collateral although the lender is “hypothetically” in control of the collateral. If you default, the lender will seize control of the collateral. A mortgage or car loan would be a good example of this.
Now what is important is to ensure that you receive two documents from the bank when you close down your car loan :
- a No Dues or No Objection certificate from the bank which essentially means that the bank has no objection to removing the hypothecation.
- 2 copies of Form 35 which will mention the termination of the hypothecation agreement between you and the bank.
Banks usually take 2-3 weeks to send across the No Objection certificate to you. Once you have this, you should hop over to the RTO (Regional Transport Office) to get the hypothecation removed from your old vehicle registration and your smart card. But before you do, there is more ground work to be covered.
You need to collect the following documents and then go to the RTO.
- Original Bank NOC
- Original RC
- Original Form 35 (2 copies duly signed by the bank and registered owner)
- Copy of valid insurance – attested
- Copy of valid PUC (Pollution Under Control) certificate – attested
- Copy of PAN Card – attested
- Copy of Address Proof – attested
- And if you current address is different form the one in RC, you also need Form 33
Apart from the trip to the RTO, you will also need to liaise with your insurance company. You will also need to submit a copy of the No Dues certificate that you received from the bank to the insurance company that covers your car for comprehensive insurance so that the hypothecation is removed from their books also.
Once all the due diligence is done, you will obviously receive written confirmation from the parties that this has been done – check twice to ensure that this is the case.
The process of collecting documents from the bank is very tedious especially if you are stuck with a public sector bank. Firstly, no bank will want you to close down your loan as it is loss of business for them and secondly they might make you run around to demoralize you. And your experience at the RTO is another sad story waiting to be told with agents and touts wanting their cut of the pie – you might as a result have to make multiple trips to the RTO to get this accomplished yourself.
Anyone has had any experience on removing the hypothecation on your RC after closing down your car loan, good or bad, please share with others here ?