Car Loan Closure Procedure

Today, many individuals opt for financing when purchasing a new car, as it avoids a substantial upfront payment and preserves liquidity. Car loans empower people to realize their dream of owning a vehicle, particularly those with a modest income. The market offers various car loan options, making it feasible for anyone with a stable income to finance a car.

Securing a car loan has become more accessible with most banks offering favorable terms and low EMIs. Despite the ease of obtaining a car loan, navigating the loan closure process can be challenging. 

However, the general steps to close a loan are similar across banks. Our guide outlines these steps and explains how to close a car loan online in India.

How to Close a Car Loan?

Closing a car loan in India involves a series of steps. Here's a general guide to help you navigate through the process:

1. Check Outstanding Amount
Contact your bank or financial institution to determine the outstanding amount on your car loan. This includes the principal amount and any applicable pre-closure charges.

2. Calculate Pre-closure Charges
Use a prepayment calculator or consult with the bank to calculate any pre-closure charges. Different banks may have varying penalty structures.

3. Gather Necessary Documents
Collect essential documents like the car's registration certificate (RC), insurance papers, Permanent Account Number (PAN) card, and the latest bank statement reflecting the clearance of the last Equated Monthly Installment (EMI).

4. Visit the Bank
Visit your bank branch where you took the car loan. Inquire about the pre-closure procedure and the exact amount to be paid.

5. Make Payment
Pay the total outstanding amount along with any pre-closure charges. You can make the payment through a demand draft, cheque, or online transfer.

6. Collect Loan Closure Documents
Obtain a loan closure certificate, a statement confirming the loan closure, and a No Objection Certificate (NOC) from the bank.

7. Remove Hypothecation from RC Book
Visit the Regional Transport Office (RTO) to remove hypothecation from the car's registration. Provide the NOC and other required documents.

8. Update Insurance
Share a copy of the NOC and Form 35 with your car insurer to update the insurance documents and remove hypothecation.

9. Keep Acknowledgment Receipts
Retain acknowledgment receipts from the bank, RTO, and insurance company as proof of loan closure and removal of hypothecation.

10. Update Personal Records
Ensure your records reflect the loan closure, and that there are no pending obligations with the bank.

Remember, specific procedures may vary slightly among different banks and financial institutions. It's advisable to contact your lender directly for precise instructions tailored to your car loan agreement.

How to Calculate Foreclosure?

To calculate the foreclosure of your loan, on how to close a car loan follow these steps:

1. Determine the amount you want to repay before applying for the loan.
2. Decide on the loan tenure.
3. Use an online EMI calculator to compute the monthly installment based on the interest rate.
4. Figure out the month until which you intend to pay the EMIs.
5. Select the foreclosure month.
6. Calculate the charges associated with car loan foreclosure during the chosen month.

Lenders typically impose a percentage of the outstanding amount as foreclosure charges, ranging between 2% to 5%, along with additional taxes. These charges help compensate the lender for some of the lost interest due to early repayment. It's crucial to factor in this penalty when planning for loan foreclosure.

Steps to Foreclosure

Steps for loan foreclosure can be completed both online and in person at the lending branch:

1. Submit a written request for loan closure.
2. Provide necessary documents, including personal identification proof (PAN card, Aadhar card, driving license, or passport), loan documents, loan account details, and bank statements reflecting the last EMI payment.
3. The bank will calculate the remaining loan balance based on the paid EMIs and interest. They will inform the borrower of foreclosure charges, taxes, and the prepayment date.
4. Based on this information, the borrower clears outstanding dues through cheques, demand drafts, or online fund transfers.
5. After settling the pending amount, the bank initiates foreclosure by halting EMI deductions and reminders. All original car documents are handed over to the borrower within 15 business days.

Documents Required for Foreclosure

To pre-close a car loan, you need to submit the following documents:

1. Car insurance document
2. Vehicle registration document
3. Permanent Account Number (PAN) Card
4. Bank statement confirming the clearance of the last EMI
5. A pre-closure request letter signed by the loan applicant
6. Pre-payment statement

Payment can be made using a demand draft, cheque, or cash.

Upon completing the car loan foreclosure, the borrower will receive the following documents from the lender:

1. Acknowledgment letter
2. Receipt for foreclosure payment
3. No Due Certificate
4. NOC (No Objection Certificate) to close the car loan
5. Loan closure certificate
6. Vehicle registration certificate, insurance documents, tax documents, and Emission Certificate
7. All canceled post-dated cheques (this needs to be done in person)
8. Ensure Form 35 is filled, canceling hypothecation and stating the termination of the loan agreement
9. NOC to be submitted to the Regional Transport Office (RTO) and insurance company, valid for 90 days from the issuance date. Visit the RTO within 90 days with the original (and a copy), Bank NOC, RC book (Registration Certificate), Form 35 signed by the bank and yourself (two copies), car insurance document, Pollution Under Control Certificate (PUC), and personal ID with address proof.
10. Ensure the registered hypothecation is canceled in the RC book. You will receive a temporary receipt to use until the updated book is issued.
11. Submit a photocopy of the updated RC book at the insurance office to officially cancel hypothecation through a formal letter stating the same.

Calculating Pre-closure Penalty Charges

To calculate the penalty charges for pre-closing car loans, the fees may differ among banks. Several major financial institutions provide a prepayment calculator on their websites, enabling users to estimate potential penalty charges.

Alternatively, borrowers can inquire directly with the banks to understand the applicable penalty charges. Some banks follow a standardized fixed percentage for the pre-closure of car loans. For example, a bank might impose a 5% charge on the loan amount if it's pre-closed after the first year.

Pre-closure Procedure for Car Loans

To pre-close a car loan before the payment term, borrowers should follow a specific procedure. When obtaining a loan for a car purchase, the bank's name is endorsed as the lender in the vehicle's registration certificate.

Here's a step-by-step guide to the pre-closure process:

1. Calculate the total repayment amount, including penalty charges for pre-closure, either by checking with the bank directly or using a prepayment calculator for accuracy.

2. Gather all necessary documents for loan prepayment, including the registration book (RC), insurance certificate, tax certificate, and emission certificate.

3. Pay the amount directly at the bank branch or confirm online payment options. If paying remotely, ensure all paperwork is appropriately handled.

4. Collect essential car loan termination documents from the bank, such as post-dated checks provided during loan approval, a No Objection Certificate (NOC) indicating the removal of hypothecation (2 copies), Form 35 signifying the termination of the hypothecation agreement, and any other documents submitted during loan approval.

5. Once all documents are collected, visit the Regional Transport Office (RTO) to eliminate hypothecation from the car's registration. Provide a copy of the NOC and Form 35 to the RTO, along with documents like the RC book, license, Pollution Under Control (PUC) certificate, and insurance.

6. The RTO will modify your RC book to reflect the removal of hypothecation, a process that may take some time. During this period, use the RTO acknowledgment receipt as a temporary substitute for your RC book.

7. Furnish a copy of the NOC and Form 35 to your car insurer to eliminate hypothecation from your insurance documents. Once approved, retain the acknowledgment copy provided by the insurer.

Conclusion

In summary, the article contains how to close a car loan in India which involves several important steps, such as calculating outstanding amounts, gathering documents, and coordinating with the bank and Regional Transport Office (RTO). 

The pre-closure process requires careful attention to detail, ensuring proper documentation and the removal of hypothecation. It's important to calculate foreclosure charges, understand their impact on credit scores, and consult directly with the bank for accurate information.