In every loan agreement, there are various types of clauses mentioned. These clauses are put to ensure that the interest of both i.e. financial institution and borrower is protected. The car loan surrender letter is one such clause that is prepared by the legal team of the financial institution to safeguard their interest. Therefore, the borrowers need to familiarize themselves with any loan agreement clause that you are agreeing and understand the implications of the clause before signing the document.
What is the clause?
Most of the borrowers would have noticed this clause while signing their loan agreement but may not have cognizance of its importance. Here is how a clause of your loan agreement looks like-Most of the borrowers would have noticed this clause while signing their loan agreement but may not have cognizance of its importance. Here is how a clause of your loan agreement looks like- “I hereby voluntarily and without coercion from anyone, surrender the above vehicle to ___ Bank, the agent of the ___ Bank under the rights vested with ___ Bank under the composite Loan Agreement (cum Hypothecation) for Car Loans and Guarantee executed between us, whose terms and conditions I have violated by defaulting on the scheduled repayment of the above loan. I hereby confirm that there is no cash or other valuable in the said vehicle whose possession is being taken as aforesaid.”
Why do financial institutions require a car loan surrender letter?
You might wonder as to why financial institutions ask you to sign the surrender letter beforehand. As a car is a highly movable property, which can be easily dispose by the borrower by illegally selling it to another person or disappearing to the place that is untraceable. To prevent such a situation, the borrowers need to sign the car loan surrender letter at the time of loan approval. If the borrower agrees to this clause, it will help the bank safeguard its interest and can repossess the car rightfully (as per the court's order) in the case of a defaulted car loan.
Car loan foreclosure notice
The financial institutions do not repossess the car in the first instance of a missed EMI payment. The borrower will first receive the notices regarding the outstanding dues. When the borrower has failed to heed such notices, then only the banks starts with the process of a car loan foreclosure. A borrower who makes timely EMI payments does not have to worry about this clause. However, it can be a matter of concern for those who do not pay on time.
Voluntary surrender of the car to the bank
When a bank forecloses a car loan, the credit standing, and credit history of the borrower is adversely affected. The voluntary surrender of the car may sound like a better idea. Whether you surrender your car voluntarily or it is repossessed, it implies the same thing i.e. your inability to repay the car loan as per the agreed-upon terms. However, voluntary surrender of the car will portray your negative impression in front of the future lenders regarding your inability to pay the debt that you took. It will further affect your future credit application requests. Take necessary actions to improve your credit score to boost your chances of loan approval.