5 Factors To Consider While Closing Your Loan Account: While closing your loan account, you must consider various factors carefully, like prepayment penalties, credit score, etc., to ensure that it goes without a hitch. Says Ashish Tiwari, chief marketing officer of Home Credit India, a Non-Banking Financial Company (NBFC) : “During a loan closure, customers tend to miss out on crucial details that may cause issues when trying to take another loan.”
Harikumar L., General Manager of the retail banking department at South Indian Bank, says: “Before closing or pre-closing their loans, borrowers must keep in mind several important considerations like reviewing the loan terms, checking outstanding balance, verifying pre-payment clauses, credit score impact and finally the documentation for the loan closure.”
The following tips can help borrowers make informed decisions and avoid pitfalls.
When contemplating the closure of a loan, one must first consider the associated charges.
“It is imperative that the borrower first informs the financial institution (from where he/she has taken the loan) and enquires about any foreclosure penalties that may apply. Start by understanding any potential pre-closure charges that may apply, as these can vary between loan products and financial institutions,” says Tiwari.
Reserve Bank of India (RBI) prohibits prepayment penalties on floating-rate home loans but allows up to a 3 per cent penalty on fixed-rate home loans. Vehicle and personal loans may have prepayment penalties, typically 1 to 5 per cent of the outstanding balance.
Harikumar also suggests seeking guidance from a financial advisor to ensure a seamless loan closure. He adds, “The larger aspect to be considered by borrowers is the ‘opportunity cost’ of funds. If the borrowed funds are generating higher returns than the interest rate paid on the loan, then there is no worthwhile reason to close the loan.”
Ensure that your credit score reflects your responsible repayment behaviour. Financial institutions are responsible for updating borrowers’ loan repayment actions in the CIBIL database. Delays can occur in this process even after the full repayment. CIBIL has a turnaround time of 30 days, subject to the bank or the financial institution’s processing time.
Tiwari advises borrowers to pay close attention to their credit scores after loan closure, as any neglect can adversely affect borrowing opportunities in the future.
Says Tiwari, “In case it’s a secured loan, the customer should ensure that all securities are taken back from the financial institutions shared during the loan-taking process.” Banks retain sale deeds, conveyance deeds, power of attorney, cancelled checks, etc., during the loan sanctioning process. Retrieving these documents is a crucial step towards closing a loan account.
Securing a No Objection Certificate (NOC) is vital in the loan closure process. This certificate proves that all dues have been cleared, and the lender no longer holds any legal rights over collateral or documents provided. Tiwari says, “The customer should also keep all the original documents provided when applying for a loan, as they are important for the financial security and records of the customer.”
Borrowers should review the final equated monthly instalment (EMI) calculation correctly, ensuring that the payments are made in full till the date when the amount is credited to the financial institution. “In case of payment made using ‘pay later’ instruments like a cheque, customer should include the clearance time and get the correct interest calculation to avoid paying penalties later,” Tiwari adds.