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Overview: Loan Closure
It is believed that acquiring loan is a lengthy and time taking process. Same is the scenario with closing a loan. Loan closure is the technical name for the process of closing a loan. A loan can be closed either at the end of the loan tenure which is termed as Closure or it can be closed prior to loan tenure which is termed as foreclosure.
Loan Closure: Often people believe that paying off the last instalment ends a loan. But usually, this is not the case. Whenever a borrower takes a loan, a loan account is created in their name and this needs to be ‘closed’ once your loan is over. This process is known as loan closure.
Foreclosing: Post 6 months of sanctioning a loan, all banks provide the option of closing the loan by paying the principal part and a small percentage of the interests. That is called foreclosing.
How to close a Loan? Wondering what’s the answer to this question? Here is the answer to it. Follow these steps to close a loan.
- Make sure that you have plentiful balance in your account to close the loan account.
- Select e-services tab on top and select Closure of loan A/c from the list of options on the respective bank’s website from where you are willing to take up the loan.
- After filling in the details a request is sent to the bank for the closure.
- As a reminder, you can send a mail to the bank saying that you have sent a request for loan closure.
Types of Loan Closures:
The concept of Loan Closure has been categorized into 4 different types. They are as follows
- Regular Closure
- Bad Loan Closure
- Settled Loans Closure
1. Pre-Closure: This type of loan closure relates to closing the loan before completion of the loan tenure. There is one question that frequently keeps coming to the mind of every borrower which is “When can you pre-close the loan? “ Different banks have different terms and conditions when it comes to paying off the loan early. Most banks ask to pay a certain number of EMIs. (Ex: 3 or 6 or sometimes 12 EMIs) before you can pre-close the loan.
- Pre-closure Charges: In the case of Loans on Fixed and Floating rate of interest, no pre-payment or pre-closure penalty will be collected on Home Loans irrespective of the period for which the account has run. Essentially all banks and housing finance companies levy a prepayment penalty if the loan is paid off before the tenure completes. It is completely at the discretion of the respective Bank to charge or not to charge you preclosure amount. Ideally, you should not be charged pre-closure charge when you are pre-closing your home loan with your own funds.
- Pre-closure Conditions: It is, therefore, necessary to read carefully sanctioned terms. Whether prepayment of loan is allowed or not and if prepayment charges are applicable is generally mentioned in the letter of sanction addressed to the borrower and guarantor. Bank also obtain an acknowledgment of terms and conditions of loan sanction.
- Documents Collection: Usually there is a list of documents that a borrower should be getting back after closing a loan. The following documents need to be definitely collected from the bank after a loan closure.
- Before closing the loan you ought to prepare a list of documents available with the bank. This list will be handy checklist once you get the documents back.
- Acquire the Loan statement for the entire tenure of loan tenure which distinctively displays principle and interest paid, which could be used for future tax purposes.
- The loan closure letter (also called NOC sometimes) should also be collected
- It has to be strictly taken care of that all document pages in your original document are placed correctly in an order once you get them.
- It is to be checked that the bank has sent request of your loan closure to CIBIL.
- Gather NOC: On repayment of loan dues one can obtain a no due certificate (NOC) from a bank. It is also sometimes referred to as NDC (No Dues Certificate). It is a legal document that apparently mentions that you, the borrower, have paid all outstanding dues to the lender. This certificate includes your name, your account number and many other details. The NOC also indicates that the lender no longer has any legal rights or claims over your collateral.
- Credit score update: Pre-closure does not straight away affect the credit score. But your chances of creating a good credit history, which results in an improved score, shall get affected. Even if you have the appropriate funds, it is recommended that you persist to make your payments on time and close your account on the initial due date.
2. Regular Closure: After paying off all the EMI’s, the borrower should visit any Loan branch and officially close the Loan and get the Closure letter. This is a very significant step in closing a loan. When a borrower closes a personal loan taken from any bank or NBFC it’s called as personal loan closure.
- Credit Score Update: Closure of a Loan negatively impacts CIBIL Score. Pre-closure of a Loan too early can also impact future creditworthiness despite good CIBIL Score. A secured loan like Home Loan improves CIBIL Score. Home Loan Closure takes away crucial points from CIBIL Score. Personal Loan and Car Loan are unsecured loans and adversely impacts CIBIL Score
3. Bad loan closure: A Bad loan is an amount owed by a person that is doubtful to be paid in due. When the debtor has become bankrupt, banks generally write off bad loans.
- Statement of account (SOA): Statement of account is a record of all transactions in your bank account. It states the list of all deposits as well as withdrawals and indicates the balance in your account at any point of time. It may be in the form of a passbook or a printed statement.
- Credit score update: The bank will change the borrower’s status from “Default” to “Settled”. This will result in improving the credit score. The perfect way to maintain a good credit rating is timely payment of your bills.
4. Settled Loans closures: Closing the loan account by paying complete EMI’s on time will have a good impact on your score. Settlement of loan depicts an element of negativity on your repayment capacity. The future lender may decline the loan application looking at your old accounts and this will also reduce the credit ratings.
- SOA: If a borrower fails to deposit his dues to the bank in form of EMI or installments for the liquidation of the entire loan, then this loan account becomes an NPA (Non-Performing Assets) and he is a defaulter. A bank considers an account NPA if the payment is irrecoverable for more than 90 days. Ex: If a borrower has not paid the last three EMIs then his account will be considered as an NPA
- If an applicant becomes a loan defaulter, the lender generally listens to the applicant and understands the cause of it. The following options are given to the borrower to fix it.
- Loan Restructuring
- Prepayment of home loan partly , in order to reduce the EMI and,
- Reimbursement of investments.
- Offer letter: Full Closure, Settlement: Full Closure or Settlement relates to installment accounts, like car loans, when after the last payment is made and you have completed repayment of the loan as agreed. If a loan has been settled, the loan status will be shown as ‘settled’. This will create a negative impact on your creditworthiness wherever you go and apply for a next loan.
- Credit score update: Full Closure will create a negative impact on your creditworthiness wherever you go and apply for a next loan. Once you settle the balance – and provided you have money for it – it will take the time to get this off your report, and then a bit of time for your credit score to normalize.
Important things to complete while closing a loan:
There are few things that have to be kept in mind while going for a loan closure. Listed below are the steps to follow while closing a loan
- Take back your original Documents from Lender: While availing a loan, a complete set of documents are submitted to the lender. It is crucial to take back all the original documents from the lender.
- No Objection Certificate (NOC): It is substantial to collect NOC from the lender. Firstly the NOC should evidently mention the address of Property against which loan was taken, Name of Borrower and Loan Account Number of Borrower. Secondly, it should state that all the dues are paid by the borrower and lender does not have any rights or claims on the property.
- Remove Lien from Registrar Office: The next step is to get the lien removed on the property from Registrar Office. A lien is a legal right demanded against an asset that is used to secure a loan which must be paid when the property is sold. The borrower needs to make sure that the lien is removed after loan closure or else, it may be so that if u plan to sell your property, you need to revisit your lender to get it removed. In simple terms, it signifies that until till lien is removed from your property on request of the lender, you cannot sell your property.
- Make sure your CIBIL report is updated with closed entry: As and when a loan is taken, banks inform CIBIL about it. During a loan closure, a written request should be given to the Bank to inform CIBIL regarding the closure of your loan account and all dues are paid.A borrower should request for CIBIL report from their website and cross verify whether your Bank has updated your CIBIL record or not. If it has not been updated by the bank, you can directly request CIBIL to update your records online.
Usually, CIBIL reverts within 15-20 days with a status update on your request as they verify with a bank for confirmation.
How to Close Different Types of Loans:
- Personal loan
- Home loan
- Car Loan
- Education Loan
- Two Wheeler Loan
- Used Car Loan
- Commercial Vehicle Loan
- Gold Loan
- Loan Against Property
- Loan Against Securities
- Business Loan
Closing a loan certainly reduces the debt burden from the shoulders of the borrower. It is very crucial to carefully complete all the procedures with the bank so that the closure is done with complete care and complexities are warded off. The best way to close a loan in an appropriate way without facing any difficult situation is by taking the help of the Credit advisory services of Creditseva and stay creditworthy.
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