Life is full of uncertainties. There are times when an individual needs fast access to a considerable amount of cash. But, he may not know from where to raise it at a short notice. Plus, for those who are already repaying several loans, unforeseen cash needs are a worrisome situation.

People caught in crises like these can resolve their dilemma easily by taking loans against their cars. Banks and non banking finance companies readily offer loans against cars to individuals as these are secured loans. There is no need to be an existing customer of the bank to avail this facility from one. It means that borrowers can approach any bank offering this scheme and pledge their vehicles to avail funds. Although, it is not a widely advertised loan product, many leading banks, such as HDFC Bank and Kotak Mahindra Bank, are offering ‘loans against cars' schemes for new as well as used cars (as old as 5 years old).

This type of loan is also known as a ‘car overdraft' facility and can be compared to taking a personal loan from banks. Like personal loans, they can be availed for any purpose and there is no restriction on the end use of the money raised through this loan. On top of that, as car overdraft is a form of secured loan, interest rates on these are lower than personal loan interest rates. As for the loan amount, borrowers can get up to 85 % to 90 % of the value of the car as loans. Loans against cars generally have to be repaid within a period of 1 to 3 years. 

How does a Car Overdraft work?

The lender opens a current account with zero balance in the borrower's name. On opening of the account, the borrower gets the usual bank utility items like cheque books etc. But, before sanctioning the loan, lenders first hypothecate the car against which loan is availed. Hypothecation of the pledged vehicle is a very important feature of this loan. In this, a lien is marked on the hypothecated vehicle's certificate of registration, which is a document providing proof of ownership of a vehicle. This prevents the hypothecated vehicle from being sold until the loan is repaid and the lender removes the lien from the car's registration certificate.     

Then, banks release the loan amount in the newly opened current account of the borrower, from which he can withdraw money as and when he needs it. Interest is not levied on the entire overdraft limit, but, only on the amount withdrawn by the borrower.

Just like the procedures followed in granting any other kind of loan, before giving loans against cars also banks check the credit history of the loan applicant from the credit information provider CIBIL. Apart from this, the background of the applicant is also analyzed to check his repayment capacity while sanctioning the loan amount.