In every loan agreement, there are various types of clauses which often confuse the borrower. In most of the cases, these clauses are put to ensure that the interest of the financing company is protected as the agreement draft is prepared by their lawyers. It is thus essential for the borrowers to understand and appreciate the implications of all the clauses that are mentioned in the agreement of a loan before signing and accepting the terms and conditions specified. The surrender letter in a car loan is one such clause which very few people actually understand and know about.
Most of the borrowers would have noticed this clause while signing the loan agreement, but may not have cognizance of its importance. The usual text of a surrender letter that the banks insist upon being signed by the borrower may read as follows –
“I hereby voluntarily and without coercion from anyone, surrender the above vehicle to ___ Bank, the agent of the ___ Bank in accordance with 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 schedule 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 this Clause?
The text of the clause may sound quite unacceptable to the borrower at a closer look, however the banks have some justification in getting such a document signed. This is the safeguard for banks against any borrower defaulting and failing to respond to the bank’s notices subsequently. The major problems that the financiers face in case of a car loan is that is a highly moveable property which can be easily disposed by the borrower via an illegal sale to another party or move it to a location where it becomes untraceable. In such a scenario, the banks will face enormous difficulties in declaring the borrower as a defaulter due to his sheer non-availability.
In such circumstances the bank is left with no choice but to declare the borrower as a defaulter by approaching the court for legal remedy. This process is quite cumbersome and requires effort by the bank’s lawyers. In order to prevent these kinds of difficulties the banks get the surrender letter signed beforehand at the time of the loan approval to protect themselves from any misconduct or malpractice by the borrower at a later stage.
By signing this letter the borrower makes it easy for the bank to take physical possession of the vehicle after obtaining a court order to this effect.
However the borrower can be rest assured that this is not a standard practice by the banks for customers who fail to pay up a single installment. The normal process involves intimating the borrower of pending dues and then providing adequate notice to pay up the defaulted amount before initiating legal action to physically recover the vehicle. The surrender is inconsequential for the responsible customer but comes extremely handy for financers when unscrupulous elements try to take undue advantage of car loans to buy vehicles that they do not intend to pay back for!