Foreclosing A Loan Keep These Points in Mind

Your first Two-wheeler, your dream car, the next step in your business, all of these promise to change your life in a positive manner. However, for many of us, all of these will require external financial support. Usually, this external support is in the form of car, two-wheeler or business loan.

Most of us avail loans from NBFCs or Financial Institutions depending upon our financing need and the institutions readiness to grant us a loan. Borrower's usually decide on an estimated time frame needed to repay the loan, post which (if all dues have been cleared) the lender issues a No Objection Certificate stating that the loan has been repaid and the borrower is free from all liabilities pertaining the loan in question.

Sometimes, the borrower's ability to repay a loan may increase over a period of time and they can foreclose the loan earlier than expected. Foreclosing a loan works perfectly for the borrower, however, the NBFC, Bank or Financial Institution involved may charge a penalty on prepaying the loan amount.

Most loans can be prepaid after a predefined lock-in period. Depending upon the borrower's repayment capacity, part payment helps bring down the principal amount to be repaid and the interest component involved, thus bringing down the entire amount to be repaid. Part payment tends work better when the amount being prepaid is greater than the value of 3 monthly EMIs.

If you decide to foreclose your loan, then you need to ensure closure of all financial/ non-financial claims that the Financial Institution may have:

1. Request for Foreclosure and List of Documents held by the NBFC/ Financial Institution

The borrower must inform the lender about foreclosing the loan. Some loans may have a penalty on foreclosure. Once the borrower has intimated the lender and the lender has accepted the proposal, the borrower must carry his/her ID Proof, cheque/ DD for foreclosure and loan account number. Along with that, the borrower must also request for the documents held by the NBFC/ Financial Institution.

2. Clear All Dues and Ask For NOC

The borrower must first clear all pending dues of the lender, and then ask for a No Objection Certificate (NOC), since the ownership lies with the bank until the loan is repaid. An NOC helps the borrower prove that he/she do not owe any money to the lender and the property is theirs to own. The NOC mentions all key details pertaining to the loan.

3. Lien Removal and Request for Legal Clearance Certificate

When you apply for a loan, the lender creates a lien on the property by registering documents at the local registrar's office. Upon foreclosure, the borrower must intimate the lender to remove the lien from the registrar's office. Once the lien is removed, the borrower can sell the property at a later date or use it to raise a loan. Once the lien is removed, the lender has no claim on the property, but you can safeguard yourself by obtaining legal clearance from a legal advisor. This will ensure that the loan is closed properly and the borrower will have no outstanding liabilities. You must also get an Encumbrance Certificate (EC) post getting the lien removed.

4. Retrieve Original Property Papers and Documents, Post Dated Cheques, etc.

When the borrower avails loan, the lender will ask for some original documents like property papers. Once you get the NOC and the clearance letter from the lender after loan repayment, ensure that all your documents have been returned properly. Sign the acknowledgement letter only after adequately verifying the documents that have been returned, as the lender cannot be held liable for any issues that may arise at a later date. If you have given any post-dated cheques to the lender, make sure to collect those too.

5.Check CIBIL, ensure that the lender has made the requisite CIBIL entries

Ensure that your CIBIL score is updated by the bank and all entries are made appropriately, as otherwise your CIBIL may get negatively affected. Lenders sometimes don't provide updates to the Bureau, which gets reflected in the borrowers CIBIL Score.

6.Final Loan Statement (Post Closure)

Once you close the loan, you must ask for a final loan statement. This statement will contain all details of the loan including dates, amounts, payments made and outstanding payments if any. It will also specify the date the loan was closed, thus ensuring that you have a credible proof of repayment that will help strengthen your credit score and settle all debts.

Timely repayments usually help in boosting one's credit score. To ensure that your credit score doesn't go haywire, make sure you understand loan terms and conditions and ensure a balanced mix of secured and unsecured loans before you sign the dotted line.

Before you foreclose a loan, make sure that you understand the tax implications of your actions as well as find an alternative option to invest the surplus money in a place that will earn a higher rate of interest than what you'd have paid to the bank instead of foreclosing the loan. This will not only help set up a steady stream of returns, but also improve your credit standing and scores.