Buying A Used Car? Five Financial Risks You Should Check Before Signing The Papers

A used car can save you lakhs compared with buying new, but the price on the windscreen is only part of the cost. An insurance policy still in the seller’s name, an unpaid loan attached to the car or damage from an earlier flood can leave you with an unexpected bill. Before you sign the papers, check these five financial risks.

1. An Insurance Policy That Isn't Legally Yours

Under Section 157 of the Motor Vehicles Act, 1988, the policy is deemed to pass to the new owner on the date of sale, but this automatic protection effectively covers only the compulsory third-party portion. You must apply to the insurer within 14 days to have the policy changed to your name.

“The own-damage section, which pays for repairs after an accident, fire, flood or theft, requires the policy name to match the Registration Certificate (RC). If it doesn't, your claim can be rejected. Check whether the policy is comprehensive or third-party only, and when it expires,” says Kiran Kumar, Head-Motor Underwriting, TATA AIG General Insurance.

2. A Premium Discount That Belongs To The Seller

The No Claim Bonus (NCB) can cut the own-damage premium by 20 per cent to 50 per cent, but it belongs to the insured person, not the car. The seller keeps it. If you take over the policy, the insurer will usually recover the seller's discount for the remaining term, and your renewal will be priced on your own record. Also, ask for past policy schedules: a long-owned car with no NCB suggests claims, and possibly major repairs.

3. Someone Else's Loan Or Fines

A car bought on credit is hypothecated to the lender, whose name appears on the RC. Until the loan is closed and hypothecation removed, the RTO will not cleanly process the transfer, and a total-loss or theft payout goes first to the financier.

“Check the vehicle on the Vahan/Parivahan portal, insist on the lender's NOC and Form 35 if there was a loan, and make sure the seller clears pending e-challans. Then file Forms 29 and 30 promptly, because your insurance transfer depends on the updated RC,” suggests Kumar.

Similarly, check for pending challans on the car. Unpaid challans can block your Registration Certificate (RC) transfer at the RTO.

4. Damages Your Insurance Will Never Cover

Motor insurance pays for sudden, accidental events during the policy period, not for damage that existed before you owned the car or for gradual deterioration. A car that sat in floodwater last monsoon may drive well today. When its wiring corrodes months later, the repair is typically treated as pre-existing damage or wear, and the bill is yours. An independent inspection, authorised service records and an odometer cross-check cost little by comparison.

5. Cover That Doesn't Match The Car's Value

The Insured Declared Value (IDV) is the most your policy pays if the car is stolen or written off. For cars up to five years old, it is the model's current listed price minus a standard depreciation rate:

“For older cars, the insured declared value (IDV) is generally agreed between the insurer and the policyholder, based on the vehicle’s age, condition and prevailing market value. For example, if a 3.5-year-old car has an IDV of around Rs 4.8 lakh but you pay Rs 5.5 lakh for it, a total-loss claim could leave you with a Rs 70,000 gap,” says Kumar.

Check the add-ons as well. Zero-depreciation cover often comes with age limits, which vary across insurers. Engine-protection cover can also be useful, particularly if you live in a flood-prone city.

Before you sign

• Check that the RC details match the seller’s ID and the car’s chassis and engine numbers.

• Verify that there is no outstanding hypothecation on the Vahan portal. If there is, obtain the lender’s NOC and Form 35.

• Check and clear any pending e-challans.

• Review the insurance policy type, expiry date, add-ons and claim history.

• Get the car independently inspected before making the payment.

• Complete Forms 29 and 30 and apply for transfer of the insurance policy or a new policy within 14 days.

The Bottom Line

The purchase price is only the first cost of a used car. What matters just as much is how well you are protected once the car is yours - during the first week, the first monsoon and the first year. Most of these checks cost little or nothing, but overlooking them can prove expensive. Verify the records and paperwork before handing over the money.