Closing Your Loan Account? Do These Things First

So, you had taken a loan when the going got tough and your business needed funding for its daily operations. Or maybe, you had taken a loan to buy that car you had always admired from afar. However, after many months or years, you have finally paid off your loan in full and are ready to take a deep, relieved breath. Hold on though! Closing a loan account is not just about repaying the entire loan and seeing the end of it. You must collect certain vital documents from the lender before you can close the account for good. These formalities are essential to prevent any problem from cropping up in the future. But before that, let’s look at the different types of loan closure.

Types of Loan Closure

1. Regular Closure:

   A regular loan closure occurs when you adhere to the EMI due dates outlined in your personal loan agreement. For example, let’s assume you took a loan on January 31, 2021, and the loan closure date is January 31, 2025. If you pay your last EMI on January 31, 2025, it will be considered a regular closure. Regular closure does not attract any penalty. 

2. Partial Payment:

   Under this, the loan is closed on the binding due date. However, the portion of the outstanding balance is paid well in advance of the date specified in the loan agreement. The majority of borrowers use this method to reduce their EMI burden or, in some cases, to close the loan before the due date. Partial prepayment incurs a penalty of 1 to 2% of the amount paid in advance. If you have received a windfall gain, you can go for this type of loan closure process.

3. Loan Foreclosure

   A loan foreclosure, also known as a pre-closure, is a situation in which you choose to pay off your entire outstanding loan balance at once. Typically, financial institutions allow for pre-closure only if you have paid all of your EMIs on time for the first twelve months. The foreclosure will be beneficial if any of your investments are maturing, you receive a bonus from the office, or you want to take a larger loan. In these cases, foreclosure will help you with lowering your debt coverage ratio and improving your credit score. For this, you can draft a letter for closing the loan account before the due date. It's important to note that foreclosure charges on personal loans may apply, depending on your lender's policies and the terms outlined in your loan agreement.

Also Read: How To Improve Your Credit Score After A Loan Settlement?

Things to Keep in Mind When Closing Your Loan Account

Obtain NOC: 

No Objection Certificate (NOC) or No Dues Certificate (NDC) is a document that proves you have closed your account and no EMIs are pending in your name.  Before submitting your loan closure application, obtaining this certificate from the borrower is crucial. In the future, you may need to provide NOC when applying for a higher loan amount. You will also need it if you find any discrepancies in your credit report, indicating that the loan account you closed is still open.
 
You must send an email with your NOC to the credit bureau in question, requesting that they correct the error as soon as possible.

Collect the Statement of Accounts:

In addition to the NOC, ask your lender for a loan account statement. The statement includes information about the EMI you have paid to date. If your account still shows an outstanding balance after you have paid all of your dues, contact your lender and ask them to update their system and send you a new statement with the balance showing zero.

Obtain Original Documents:

This comes into play when you took out a secured loan and had provided your house documents or vehicle papers as collateral. Also, your lender may request your original education certificate when applying for an education loan. In such cases, you must ask your lender to return your documents when you close your loan account. After you have received all of your papers, sign the acknowledgement certificate.

Get the Lien Lifted:

When you apply for a secured loan and provide your investment certificates or property documents as collateral, the lender retains conditional ownership on the pledged assets, also known as a lien. It is your responsibility to have the lien removed as soon as you submit your loan closure application. If you overlook this point, you will have difficulty obtaining funds against the same asset in the future.

Take Your Security Cheques Back:

When you apply for a loan and are approved for it, the lender will ask you to provide a post-dated cheque. They request these cheques to protect themselves from any financial frauds or EMI skips (if repayment is not automated). However, as soon as you have paid off all of your outstanding debts, request that the lender return those cheques.

Inform the Credit Bureaus:

When you close your loan account, your lender is required to notify the credit bureau. If they do not, your loan account will remain open and will show skipped or delayed EMIs, lowering your credit score. Check with your lender to see if they have submitted the loan closure report to the credit bureau. 

Well, to make things easy for you, here is a simple infographic that details all that you need to collect from the lender and why informing the credit bureau about the loan closure is important. Keep it handy:

Conclusion

So, your loan journey is not over until you collect the above documents and the credit bureau is informed about how disciplined a borrower you have been. Only then will your loan account be truly closed.

Get in touch with Hero FinCorp to know more about smart loan closure.

Frequently Asked Questions

1. What Is A Regular Loan Closure?

A regular loan closure occurs when you repay your loan by adhering to the EMI due dates outlined in your personal loan agreement. There are no penalties involved if you make all payments on time and complete the loan term.

2. What Is Loan Foreclosure?

Loan foreclosure, or pre-closure, is when you pay off the entire outstanding loan balance at once before the due date. This usually requires that you have paid all EMIs on time for the first twelve months

3. How Do I Obtain A Loan Account Statement?

Request a loan account statement from your lender. It details all EMIs paid to date. Ensure the statement shows a zero balance after your final payment.

4. Is A Cancelled Cheque Necessary For Opening An Equity Account?

Yes, when you open an equity account to trade in securities, you are usually asked to submit a cancelled cheque as part of the KYC process to verify your account details.

 
Disclaimer: This post was first published on 10th July, 2020 and has been updated for the latest information, freshness, and accuracy.