Car Loan Foreclosure Procedure

Equated Monthly Instalments:

• Though obtaining car loan to purchase your dream car is easy, there are certain things to keep in mind when applying for a car loan.

• One of the important factors being loan repayment. 

• Car loan is paid through Equated Monthly Instalments (EMI).

• That is why, it is necessary to plan your loan repayment schedule before applying for a car loan.                                                                                           

Car Loan EMI calculator:

• Visit the bank website or a third-party comparison website to get your car loan payment schedule.

• Use the Car Loan EMI calculator available online to get instant and accurate results.

• All you have to do is enter your chosen car loan amount, loan tenure, interest rate, and processing fee into the tool.

• Click on 'Calculate' and get your monthly EMI, interest payments, and the outstanding balance after each EMI payment in the form of an amortisation table.

Low debt-to-income ratio:

• Ensure your car loan EMI doesn't exceed more than 50% of your salary.

• It is advisable to maintain a low debt-to-income ratio as a high debt-to-income ratio means there is a higher chance of defaulting on your car loan.

Prepayment in car loan

• If you come into sudden inflow of cash, you can make partial or full prepayment of your car loan before the end of its tenure.

• Banks charge a prepayment fee for prepaying the car loan before its tenure.

• The prepayment fee is a small percentage of the outstanding principal amount of the car loan.

• Go through the prepayment clause at the time of applying for a car loan from a bank.

• Pre-closing a car loan before the end of the tenure can negatively affect your credit score.

• Usually, a borrower decides to prepay or pre-close a car loan because he or she has come into a sudden inflow of cash and doesn't want to pay EMIs anymore.

• Pre-closing your car loan can help you save up on interest.

• Although the borrower is willing to preclose the car loan, the bank may not allow it. 

• That is why, banks charge penalty fees for pre-closing car loans.

Difference Between Prepayment and Foreclosure

Prepayment is when a borrower prepays a part of the car loan in advance whereas preclosure/foreclosure is when whole of the car loan is paid before the end of the loan tenure. Prepayment charges and foreclosure charges differ from bank to bank. Therefore, before applying for a car loan from a bank, go through the terms and conditions set by the bank with regards to prepayment and foreclosure.

There are certain valid reasons why pre-closing/foreclosing a car loan may not be a good idea:

Put the funds to better use:

• The funds that you use to preclose the car loan can be used to invest in a good systematic investment plan with a good return on investments.

• This move is beneficial especially when you opt for a lower interest rate car loan.

Penalty charges:

• Prepayment and foreclosure charges levied by the bank are an additional expense that you will have to bear.

• Banks usually allow prepayment of loan only after 12 EMIs have been paid. This lock-in period varies by bank and loan type. 

• The penalty fees may vary for the first prepayment and second prepayment.

• Therefore, before you decide to prepay or preclose your car loan, check the terms and conditions of prepayment and the charges levied by the bank. 

Car loan transfer:

• Some banks give you the option to transfer your car loan to another bank which offers a lower rate of interest.

• However, car loan transfer from the existing bank to another will involve additional charges.

• This option is a good choice only if the new bank offers a lower interest rate and the charges levied by the bank are lower. 

Preclose car loan at the early stages of loan tenure:

• If you have decided to preclose/foreclose your car loan, it is important to do it during the initial period of the loan tenure.

• This way, you can save up on interest payments. 

• Foreclosing a car loan at a later stage of the loan tenure is not beneficial because the penalty fees may be higher than the interest payment for the left over EMIs.

• Use the car loan EMI calculator available on the bank website or a third-party comparison portal to calculate the EMI Payment, Prepayment Charges, and Interest Payment.

• Based on the results, decide when it is beneficial for you to preclose/foreclose your car loan. 

Foreclosing car loan can reduce your credit score: 

• As previously stated, foreclosing a car loan before its tenure can have a negative impact on your credit score.

• This is because, every time you make EMI payments on time, your credit score improves.

• Paying your loan EMIs on time is a surefire way of boosting your credit score.

Procedure for closing a car loan

• At the time of purchase, the name of the bank from which you have obtained the car loan to purchase the car will be mentioned on the Registration Certificate (RC).
• Collect all the cancelled post-dated cheques given to the bank by you at the time of obtaining the car loan.
• Get the No Dues or No Objection Certificate (NOC) from the bank. The NOC has to be addressed to the Regional Transport Office (RTO) and the insurance company. NOCs are usually valid for 90 days from the date of issue. This validity period varies by bank. 
• Ensure you have the original RC book, Insurance documents, tax documents, and Emission Certificate.
• At the bank, get Form 35 which will mention that the hypothecation has been cancelled between you and the bank.
• Form 35 basically states the termination of lien or agreement between you and the bank.
• When going to the RTO where your vehicle is registered, carry the original Bank NOC, RC book, 2 copies of Form 35 signed by the bank and you, car insurance documents, Pollution Under Control Certificate (PUC), PAN Card, and address proof along with you.
• At the RTO, get the hypothecation registered in the RC book cancelled.
• You will receive an acknowledgement receipt that can be used as a temporary RC book until the updated RC book is issued.
• You can also complete hypothecation termination online through the Parivahan portal by entering your vehicle's registration number and chassis details, verifying with an OTP, and submitting Form 35 with the termination date, at no fee, though final document verification at the RTO may still be required. 
• At the insurance office, submit a photocopy of the updated RC book, NOC, and the insurance documents.
• The insurer will update the records and issue a letter stating the cancellation of hypothecation.

What happens when you default on your car loan?

When a borrower fails to make EMI payments repeatedly, it is considered as car loan default. The terms and conditions of car loan default varies from bank to bank.

• It is advisable to negotiate with the bank when you suspect that an EMI payment can't be made on time rather than avoiding the lender.

• Give valid reasons for not being able to make your car loan EMI payments.

• The bank may agree to extend your car loan tenure or the due date of the EMI payment.

• Usually, late payment charges are levied on late EMI payments, so request the bank to waive the late payment fee.

• The bank will send you a written notice of default for not meeting the loan repayment obligations.
• As per the Reserve Bank of India's Fair Practices Code, your loan agreement must specify the notice period before repossession and provide a final chance to repay before the bank sells or auctions your vehicle. 

• If the notice is not honored, the bank will repossess your car.

• A repossessed car will be sold off through auction by the bank to compensate for your outstanding loan balance.

• The bank will advertise the auction details of the repossessed car so that if you decide to bid for your car, you can do so at the auction.

• One of the repercussions of defaulting on your car loan is that it will negatively affect your credit score.

• As the car loan default will be mentioned in your credit report, you may not be able to obtain any type of loan for the next 7 years. This retention period can vary by credit bureau and lender policy. 

• Also, if the car is auctioned off at a lower price than the actual outstanding loan balance, then you will have to pay the difference.

• However, if the car is auctioned off at a higher price, the surplus amount may be reimbursed to you by the bank.

Summary 

Car loan foreclosure lets you clear your outstanding loan before the tenure ends by paying off the principal along with any prepayment charges the bank levies. To close the loan, obtain an NOC and Form 35 from your bank and get the hypothecation removed from your RC at the RTO, either in person or online through the Parivahan portal. Review your loan agreement's prepayment terms before you preclose, since this determines how much car loan foreclosure actually saves you.

A good credit score can help you secure lower interest rates on loans and credit cards.

Get Free Credit Score