Question

When a bank finances a vehicle, what kind of a charge does the bank have over the vehicle as a primary security?

• A. Pledge
• B. Lien
• C. Hypothecation
• D. Mortgage

Hint:

Hypothecation is commonly used in cases where the borrower retains possession of the asset, such as vehicles or goods, but the lender has a claim over it in case of default.

Answer 1

The Correct Option is C

In case of vehicle financing, the bank usually takes a hypothecation charge over the vehicle, which means that the borrower retains possession of the vehicle, but the bank has a charge on it as security.

Answer 2

When a bank finances a vehicle purchase, the type of charge it holds over the vehicle as a primary security is called Hypothecation.

What is Hypothecation?
Hypothecation is a form of a charge against a movable asset where the ownership and possession of the asset remain with the borrower, but the lender (bank or financial institution) holds the right to seize and sell the asset in case of default on the loan.

In vehicle loans, while the borrower uses and possesses the vehicle, the bank creates a hypothecation charge which is usually registered with the Regional Transport Office (RTO) as a mark of lien on the vehicle.

Key Features of Hypothecation:
- The borrower retains possession and use of the vehicle.
- The bank has a legal right over the vehicle until the loan is fully repaid.
- In case of default, the bank can repossess and auction the vehicle to recover dues.
- Once the loan is repaid, the bank issues a No Objection Certificate (NOC) and the hypothecation can be removed from RTO records.

Conclusion:
When a bank finances a vehicle, it creates a charge in the form of Hypothecation as primary security over the vehicle.