7 Things to Do When Closing Your Loan Account

Apr 06, 2024 / Reading Time: Approx. 4 mins

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7 Things to Do When Closing Your Loan Account

Availing of a loan is often a meticulous process that requires precautions and considerations. Whether it is a mortgage for your dream home, financing for a new car, or a personal loan to meet urgent needs, individuals typically navigate the borrowing landscape with caution. However, what often slips our minds is the equally crucial process of closing a loan. The moment the final EMI is paid, there is a sigh of relief, but amidst the celebration, the procedural guidelines for loan closure can easily be overlooked.

This article elucidates the often-overlooked steps and precautions to take when closing your loan account. From understanding the procedural guidelines to maximising your financial freedom post-loan closure, this article will equip you with the knowledge to handle this pivotal phase with confidence and foresight.

1. Know the Pre-closure Charges:

The majority of banks and Non-Banking Financial Companies (NBFCs) impose a penalty or fee for borrowers who opt to repay their loans before the scheduled tenure ends. Although home loans typically exempt borrowers from such penalties, car loans and personal loans often incur prepayment penalties, typically ranging between 1% to 5% of the outstanding balance before closure. Therefore, it is advisable to verify the pre-closure charges before initiating the loan closure process.

[Watch This Video: Can't Repay Your Loan? Here's What to Do (and Your Legal Rights)]

2. Get the NOC:

The document known as the No Objection Certificate (NOC) serves as proof that you have successfully paid off your loan and are no longer obligated to make any additional payments to the lender, whether it is a bank, housing finance company, or another entity. Obtaining this document is of utmost importance as it can help resolve any potential disputes that may arise in the future, mainly when selling your asset or applying for another loan down the line. Once you have received the closure letter or NOC, it is crucial to store it in a secure place and refrain from discarding it.

3. Take the Account Statement:

Occasionally, banks may provide a distinct statement of accounts. This serves as verification that all Equated Monthly Instalments (EMIs) have been promptly settled and can significantly contribute to improving your credit score with credit bureaus like the Credit Information Bureau (India) Limited (CIBIL). Maintaining a favourable credit score can prove invaluable when you seek loans in the future. Therefore, it is imperative to inquire whether a separate statement of accounts can be obtained and to safeguard it once it is received.

4. Check the Final EMI Calculation and Payment:

Borrowers must carefully scrutinise the final EMI calculation to verify that payments are made in their entirety up until the date when the amount is credited to the financial institution. If payment is facilitated through 'pay later' instruments such as a cheque, the customer must factor in the clearance time and obtain accurate interest calculations to prevent facing penalties in the future.

[Also Read: Prepayment vs Foreclosure of Loans: What Is the Difference?]

5. Get All Your Original Documents:

It is crucial to remember to retrieve all the original documents you submitted to your lender when you availed of the loan. You would have been provided with a list of documents retained by the lender, or you might have maintained such a list yourself. Therefore, it is essential to cross-reference the documents with the list to ensure that we get all the documents back. It is advisable to personally collect the documents from the bank or lender from whom you availed of the loan. While retrieving the documents, carefully inspect each page to ensure nothing is missing before signing the acknowledgement form.

6. Get the Lien Removed from Your Assets:

It is possible that the lender has registered the mortgage document with the registrar's office and placed a lien on your asset. A lien grants the lender the right to sell your asset if you fail to make your EMI payments. Therefore, it is essential to visit the registrar's office to ensure the lien on your asset has been removed upon closing your loan account.

Similarly, in the case of car loans, once your loan has been settled, it is important to visit the Regional Transport Office (RTO) and the general insurance company to have the hypothecation removed. Since the car would have initially been registered under your lender's name, it is necessary to transfer this registration to your own name.

[Also Read: Is It a Good Idea to Pre-close a Home Loan?]

7. Ensure Your Credit Score Is Updated:

After concluding the closure of your loan account and fulfilling all necessary formalities, it is crucial to inquire with your lender whether they have notified the credit bureau of the closure. If not, you should request them to do so or take the initiative yourself by submitting the required documents to the credit bureau. This step ensures that the credit bureau updates its records to reflect your timely EMI payments and the closure of your loan account, subsequently contributing to a favourable credit score when you apply for future loans.

To conclude:

Closing a loan account is a significant milestone that demands careful attention to detail. Neglecting the procedural guidelines during this phase may lead to potential complications in the future. From understanding and verifying closure fees to obtaining essential documents and ensuring proper documentation with relevant authorities such as the registrar's office and the credit bureau, each step is crucial in securing a seamless transition towards financial freedom.

By adhering to these essential steps and precautions, borrowers can safeguard themselves from unforeseen disputes and ensure a healthy credit profile for future financial endeavours. Remember, the journey towards closing a loan account doesn't end with the final EMI payment; it extends to thorough follow-up and meticulous attention to the necessary formalities. With diligence and foresight, borrowers can confidently navigate the loan closure process, paving the way for a more secure financial future.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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