Buying An Encumbered Car: Everything You Need To Know

“Encumbered” is a term used by lending companies that refers to an item—in this case, a car—that is owned by the bank (or another party) wherein the second party has the right to make a valid claim.

Most of the cars we see on the road nowadays are bought either through a secured car loan or credit loan, which means they are encumbered.

What does ‘Certificate of Registration Encumbered’ mean?

For vehicles bought either through the bank or a lending company with a secured car loan, the registration would often be described as Certificate of Registration Encumbered (CRE) instead of Certificate of Registration (CR). This means that the name or the ownership of the vehicle will be under the lender until the buyer has fully repaid the loan.

If the buyer was able to repay the loan completely, then that is the only time that their name will be placed as the owner of the vehicle.

(Read: Secondhand Car Buying Guide: Tips To Find The Best Used Cars In The Philippines)

How to check if a car is encumbered

You will be able to know if the vehicle is encumbered if there is an annotation on the Certificate of Registration (CR) that says “ENCUMBERED.”

What this means is that the vehicle is subject to a Chattel Mortgage. Chattle Morgate, as defined in the website Attorneys of the Philippines, is:

“A contract by virtue, which involves recording the personal property in the Chattel Mortgage Register as security for the performance of an obligation.”

So, the lender will give you the funds needed to purchase the vehicle; and by the time that you have officially paid of all your debts, the vehicle will be officially yours. But till then, it belongs to the lender.

How to remove the word ‘encumbered’ in your car’s CR

Once you have fully paid your car loan, these are the steps you need to take for you to get the “encumbered” annotation removed from your original CR:

1. Double-check your registration

In some cases when the buyer does not double-check if their registration is up to date, there are still some pending penalties written on the documents that were not updated that the buyer may have overlooked.

Make sure that all of these discrepancies have been cleared up before they release the documents. Call the bank or the lending company again to check if the documents are corrected and if it is ready for pick up.

2. Get the original documents

Make sure that before you go to the bank or the lending company you have these on hand:

  1. Original and a photocopy of the Loan Contract
  2. Chattel Mortgage Form
  3. Two of the following valid government-issued ID
    • Driver’s License
    • Philippine Passport
    • Professional Regulation Commission (PRC) ID
    • SSS ID
    • GSIS ID
    • BIR ID
    • TIN ID
    • Voter’s ID

Once everything has been settled, you may now go to the bank or the lending company who financed your loan to obtain these documents:

  • Original Certificate of Registration
  • Official Receipt (OR)
  • Release of Chattel Mortgage (two copies should be provided)
  • Original Registered Promissory Note with Chattel Mortgage

NOTE: You will be charged due to the notarial fee for notarizing the release of your documents. The fee ranges from P300 to P400.

(Read: Should You Buy A Car With An ‘Assume Balance’ Scheme?)

3. Cancel the mortgage

Proceed to the Registry of Deeds (RD) where the mortgage was registered. You will be able to see this in the stamp on the original Registered Promissory Note with Chattel Mortgage. If not, it should also be indicated in the original CR under the RD.

You will be asked to fill out a form then submit it together with the original Registered Promissory Note with Chattel Mortgage, Release of Chattel Mortgage and a copy of your two valid IDs (Driver’s License, Philippine Passport, PRC ID, SSS ID, GSIS ID, BIR ID, TIN ID, Voter’s ID).

The processing time for the cancellation of the chattel mortgage is different in every branch. If the person who will sign is present at the time, you may get your documents back after a few hours. If not, it would take about two to three days tops.

NOTE: You will again be asked to pay for some fees at the cashier—the amount will depend on the amount of your mortgage.

4. Land Transportation Office (LTO) Cancellation of Chattel Mortgage Fee

By the time that you have received your canceled Chattel Mortgage, you are now allowed to cancel the “Encumbered” note on your CR.

On your Certificate of Registration, it will indicate the LTO branch you need to go to have the registration status changed.

DO NOT GO TO ANY OTHER BRANCH! If the stated branch is LTO Manila, do not go to LTO Mandaluyong thinking that it would just be the same. All the records that are needed to have your registration changed are at the branch stated on your Certificate of Registration. If you go to another branch, you would just waste your time, effort, and money. You do not need to go through that kind of hassle.

Documents you need to bring:

  1. Release of Chattel Mortgage with an RD Stamp
  2. Promissory Note with Chattel Mortgage from the RD
  3. Official Receipt from the RD
  4. Original Certificate of Registration
  5. Official Receipt of the vehicle
  6. A photocopy of the most recent OR of the vehicle
  7. A photocopy of two valid ID’s from the registered car owner

Step-by-step procedure:

  1. At the LTO Branch, tell the personnel that you would like to process the cancellation of encumbrance for your vehicle
  2. Submit all the required documents: Release of Chattel Mortgage (duly stamped by the Register of Deeds) and the Official Receipt when you paid for the cancellation most especially.
  3. You will be asked to surrender the Original LTO Certificate of Registration with “Encumbered” on it
  4. The personnel will print out an LTO Certificate of Registration that no longer has the “Encumbered” annotation on it.

NOTE: There will be fees again to be paid. The price range would be around P280 to P350.

Now, you are officially the owner of your vehicle, so congratulations!