People take car loans to fulfil their dreams of owning a vehicle.?Car loans?have helped people of moderate means achieve their dream of owning a car without going through any hassles. With the range of car loans available in the market, anyone with a stable income can take a car loan. Loans are typically closed when a borrower completes all instalments and finishes the loan tenure. Moreover, it is also possible for a borrower to pre-close a loan by paying off the loan amount before the end of the loan term.

Though pre-closure is allowed for car loans, lenders typically charge a penalty from borrowers in exchange for the interest amount they are losing in the transaction. These penalties are charged based on the outstanding loan amount that is being pre-closed. Let’s take a look at various aspects of pre-closing car loans and how it could have an effect on your finances.

What Happens at Pre-closure of Car Loans?

People typically pre-close their car loans when they have excess money to do so. When there is a sudden inflow of money, many people prefer to end their debt rather than paying monthly instalments. Closing a loan brings peace of mind for many people. However, it must be noted that pre-closure of loans comes with a price tag.

Banks and other financial institutions make money on loans through the interest money paid by borrowers. When a borrower pays off the loan early, the bank is bound to lose a certain portion of the expected interest money. Hence, there is a prepayment penalty associated with the loan amount if you want to close it early. This penalty is charged to offset the loss in interest income caused by early repayment. The prepayment charges may vary from bank to bank. Though there are additional charges associated with pre-closure, it could sometimes work to the advantage of the borrower.

When to Pre-close Car Loan?

As noted earlier, there is a penalty charge associated with pre-closure of loan amounts. Before you pre-close your car loan, you must take into account the approximate penalty charges involved in doing so. If you are at the end of the payment term, it does not make much sense to pre-close the car loan by paying extra penalty amount. You may consider pre-closing the loan if you have paid only a few instalments on the loan. When pre-closing the car loan, make sure that the penalty amount is reasonable compared to the total interest to be paid.

Calculating Pre-closure Penalty Charges

Penalty charges on pre-closure of car loans may vary from bank to bank. Some major financial institutions have a prepayment calculator in their websites for users to calculate the potential penalty charges. Borrowers could also enquire with the banks directly to determine the penalty charges. Some banks offer a standard fixed percentage for pre-closure of car loans. For instance, a bank may charge 5% of the loan amount if the loan is pre-closed after the first year.

Pre-closure Procedure for Car Loans

There is a specific procedure that borrowers must follow to pre-close a car loan before the payment term. When you take a loan to buy a car, the name of the bank will be endorsed in the vehicle’s registration certification as lender. Once the loan is paid, you must make sure that all the documents are recovered from the lender without fail. The step by step procedure in the pre-closure process can be given as follows.

Step 1: Calculate the total repayment amount along with the penalty charges for pre-closure. Check with the bank directly or use a prepayment calculated to arrive at the exact amount.

Step 2: Gather all the proper documents required for prepaying the loan amount. Some of the critical documents include registration book (RC), insurance certificate, tax certificate, emission certificate, etc.

Step 3: Pay the amount to the bank by visiting a branch directly. You can also check with the bank to confirm if you can pay online. If you are paying from a distance, make sure that the paperwork associated with the process is properly taken care of.

Step 4: Collect all the car loan termination documents from the bank. Some of the key documents to be collected after pre-closure of car loan are as follows.

• Post-dated checks given to the bank following loan approval
• No objection certificate (NOC) from the bank to indicate the removal of hypothecation (2 copies)
• Form 35 to imply the termination of hypothecation agreement between the bank and the borrower
• Any other documents related to car ownership submitted at the time of loan approval

Step 5: Once all the documents are collected, you must visit your concerned Regional Transport Office (RTO) to remove the hypothecation from the car’s registration. You must provide a copy of the NOC and Form 35 with the RTO in order to remove the hypothecation. When you visit the RTO, you must carry all the documents including RC book, license, pollution under control (PUC) certificate, insurance, etc.

Step 6: Your RC book will be modified by the RTO stating that the hypothecation is removed. This could take a while to get processed. During this period, you could use the RTO acknowledgement receipt in the place of your RC book.

Step 7: Provide a copy of NOC and Form 35 with your car insurer to remove hypothecation from your insurance documents. Once the documents are approved, get the acknowledgement copy provided by the insurer.

Pitfalls to Avoid While Pre-closing a Car Loan

There are certain pitfalls that you must avoid while pre-closing your car loan. Since the car loan pre-closure procedure comes with a lot of steps, it is common to make certain blunders at some point. Here is a list of pitfalls that you must avoid during the pre-closure process.

• The NOC obtained from the bank is typically valid only for a period of 90 days. It must be submitted to the RTO and the insurance company before it gets expired. It is an unnecessary hassle to get the NOC again after its expiry.
• Make sure that the paperwork is filed correctly with the RTO. You must take care of this immediately after clearing the loan amount. If you miss out on submitting the required document, hypothecation on your car will not be removed by the RTO.
• Do not forget to get acknowledgement receipts from the RTO and the insurance company after the submission of all the required documents.

Things to Consider Before Pre-closing a Car Loan

The procedure given above provides you the detailed steps involved in pre-closing a car loan. However, before you proceed with car loan pre-closure, you may have to consider the following things.

• Check the total cost of pre-closing the car loan. You may like to avoid the lengthy repayment tenure by paying off the loan early. However, if the penalty amount is way more than the interest charges, it is not a good idea to proceed with the pre-closure.
• If the penalty charges are huge, you can consider investing the money in some other ventures where you could get better returns.
• Consult with the lender to check if there are any ways to minimize the penalty charges associated with pre-closure.
• Your credit score may not improve significantly if you pay off the loan early. If your credit score is poor, the general thinking is that paying off the loan early is likely to boost your credit score. In reality, pre-closing a car loan is likely to have very little impact on your credit score.

Conclusion

Considering all things we have discussed here, pre-closing a car loan may not be such a bad idea. However, you must weigh-in the benefits and costs associated with the process before making the final decision. Car loan pre-closure procedure involves some extra effort. However, the steps are simple and straightforward. If you decide to go ahead with pre-closing the car loan, you can follow the steps given here and enjoy the benefits.