Difference Between LC | Bank Guarantee | Hypothecation | Hire Purchase in Car Loans

Letter of Credit and Bank Guarantee

Letter of Credit is where the supplier supplies goods to the buyer on a letter of credit to him. The supplier presents the documents to the banker and gets payment if the documents are in order irrespective of the quality of goods, etc. The banker deals in documents and the documents have to be fully in terms of the letter of credit opened.

The bank guarantee on the other hand is a guarantee for the performance of a contract where bank undertakes to compensate the counter party if the bank's customer does not fulfill his obligations under the contract.

Hypothecation and Hire Purchase

Hypothecation is a floating charge on the security offered to banks. The ownership of the property is with the borrower. Interestingly, there is no law governing hypothecation in Indian Contract Act. The corresponding British Law is mortgage of movable chattels. The Indian Companies Act, Motor Vehicle Act etc., however, refer to hypothecation without defining it. So it is a charge that gets converted into pledge once the bank takes possession of goods.

Hire purchase on the other hand is a financing arrangement where the goods taken on hire purchase remain the property of the supplier/lender till the last installment is paid by the borrower. If the borrower does not repay, the owner of the goods can take back the possession of the goods.

Hire Purchase in Car Loans

For example, you are going to buy a Maruti Swift car from Maruti Udyog India. The car is worth 5 lakhs and you have done a down payment of 2 lakhs INR and for paying the rest of the amount to Maruti Udyog, which is 3 lakhs, you take a car loan from HDFC bank. Now the HDFC bank will give you a check or bank draft in the name of Maruti Udyog India and will make a payment schedule for paying car loan in monthly installments as agreed between you and the financing bank at the time of signing auto loan deal. Now on the RC of the car, the car will be in your name (borrower’s name) but HP/Lease will remain with HDFC Bank. Once you pay back all the installments or repay loan, you will get an NOC (No Objection Letter) from the bank, which is valid for 90 days authorizing you to get a new RC from Transport Authority in your area with HP/Lease of bank removed from the RC.

The above is when you pay back the loan according to the proper time and schedule but if you are unable to pay the bank loan and/or skip installments, the banking authority will have full rights for possession of your automobile (or other items).