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 s/he can withdraw money as and when s/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 Interest is not levied on the entire overdraft limit, but, only on the amount withdrawn by the borrower.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 analysed to check her/his repayment capacity while sanctioning the loan amount.
