Closing Your Loan Account? Do These Things First

Types of Loan Closure

Before submitting your loan closing application, it’s helpful to understand the three common types of loan closure:

1. Regular Closure:

A regular loan closure occurs when you adhere to the EMI due dates outlined in your personal loan agreement. For example, let’s assume you took a loan on January 31, 2021, and the loan closure date is January 31, 2025. If you pay your last EMI on January 31, 2025, it will be considered a regular closure. Regular closure does not attract any penalty. 

2. Partial Payment:

Under this, the loan is closed on the binding due date. However, the portion of the outstanding balance is paid well in advance of the date specified in the loan agreement. The majority of borrowers use this method to reduce their EMI burden or, in some cases, to close the loan before the due date. Partial prepayment incurs a penalty of 1 to 2% of the amount paid in advance. If you have received a windfall gain, you can go for this type of loan closure process.

3. Loan Foreclosure

A loan foreclosure, also known as a pre-closure, is a situation in which you choose to pay off your entire outstanding loan balance at once. Typically, financial institutions allow for pre-closure only if you have paid all of your EMIs on time for the first twelve months. The foreclosure will be beneficial if any of your investments are maturing, you receive a bonus from the office, or you want to take a larger loan. In these cases, foreclosure will help you with lowering your debt coverage ratio and improving your credit score. For this, you can draft a letter for closing the loan account before the due date. It's important to note that foreclosure charges on personal loans may apply, depending on your lender's policies and the terms outlined in your loan agreement.

Also Read: How To Improve Your Credit Score After A Loan Settlement?

Things to Keep in Mind When Closing Your Loan Account

Obtain NOC: 

No objection certificate (NOC) or No Dues Certificate (NDC) is a document that proves you have closed your account and no EMIs are pending in your name.  Before submitting your loan closure application, obtaining this certificate from the borrower is crucial. In the future, you may need to provide NOC when applying for a higher loan amount. You will also need it if you find any discrepancies in your credit report, indicating that the loan account you closed is still open.
 
You must send an email with your NOC to the credit bureau in question, requesting that they correct the error as soon as possible.

Collect the Statement of Accounts:

In addition to the NOC, ask your lender for a loan account statement. The statement includes information about the EMI you have paid to date. If your account still shows an outstanding balance after you have paid all of your dues, contact your lender and ask them to update their system and send you a new statement with the balance showing zero.

Obtain Original Documents:

This comes into play when you took out a secured loan and had provided your house documents or vehicle papers as collateral. Also, your lender may request your original education certificate when applying for an education loan. In such cases, you must ask your lender to return your documents when you close your loan account. After you have received all of your papers, sign the acknowledgement certificate.

Get the Lien Lifted:

When you apply for a secured loan and provide your investment certificates or property documents as collateral, the lender retains conditional ownership on the pledged assets, also known as a lien. It is your responsibility to have the lien removed as soon as you submit your loan closure application. If you overlook this point, you will have difficulty obtaining funds against the same asset in the future.

Take Your Security Cheques Back:

When you apply for a loan and are approved for it, the lender will ask you to provide a post-dated cheque. They request these cheques to protect themselves from any financial frauds or EMI skips (if repayment is not automated). However, as soon as you have paid off all of your outstanding debts, request that the lender return those cheques.

Inform the Credit Bureaus:

When you close your loan account, your lender is required to notify the credit bureau. If they do not, your loan account will remain open and will show skipped or delayed EMIs, lowering your credit score. Check with your lender to see if they have submitted the loan closure report to the credit bureau. 

Well, to make things easy for you, here is a simple infographic that details all that you need to collect from the lender and why informing the credit bureau about the loan closure is important. Keep it handy:

How to Submit a Personal Loan Closing Application?

There are few steps that you should know before you reach out to your lender for submitting your application to close a Personal Loan formally. Follow these steps:

• You make sure to check your loan balance and foreclosure charges with your lender.
• You can choose to either write a loan closing application or fill the lender’s loan closure form online.
• After you write the application, you must submit your application along with the final payment, including any foreclosure charges.
• You can get your loan closure confirmation along with a No Objection Certificate or NOC from your lender.

Sample Loan Closing Application Letter

Here is a loan application letter template for your reference.

[Your Name]  
[Your Address]  
[Date]  

The Manager  
[Lender/Financial Institution Name]  
[Branch Address]  

Subject: Request for Closure of Personal Loan Account No. [Your Loan Account Number]

Dear Sir/Madam,  

I have paid all dues related to my Personal Loan account no. ___________. Please close my loan account and issue me a No Objection Certificate (NOC) at your earliest convenience.
Please acknowledge receipt of this application and confirm the loan application status.
Thank you.  

Sincerely,  
[Your Name]  
[Your Contact Number]

Essential Documents to Collect for Loan Closure

After giving your Personal Loan closure application and clearing your outstanding balance (if, any), you should get the following documents from your lender:

• No Objection Certificate (NOC) - It is the proof that you have no payment due.
   
• Loan Account Statement - It is the latest statement showing your loan account balance as zero.
   
• Original Documents - If you submitted any documents (like property or vehicle) as collateral for the loan, take them back.
• Cheque Leaves – You should ask your lender to return any post-dated cheque with them.
• Lien Release Document - In case of secured loans, ensure the lien or hypothecation on your asset has been lifted.

Also Read: All About Loans

Charges and Penalties to Know Before Closing Your Loan

Make sure you know these potential fees before closing out your loan account:

• Pre-closure or foreclosure charges - These charges are typically up to 5% of the amount outstanding depending on your lender.
• Partial prepayment fees - These are the charges you may have to pay when you prepay a portion of your before the completion of your repayment tenure.
•  Processing/service fees - Some lenders may charge additional fees for the loan closure.

It is always better to check with the lender or check your loan agreement for any such fees or charges.

Also Read : What is an Instant Loan - Why is it Better than Other Loans?

After Loan Closure: What You Must Do Next 

Take a look at some pointers you need to adopt after closing your loan account.

Verify loan closure: You will have to follow up with your lender for confirmation of the closure of your loan account.

Obtain final documents: You should obtain key documents, such as NOC, and safely store these documents in your records for any future use.

Inform the Credit Bureaus: You need to ensure that the lender has informed the credit bureaus, e.g., CIBIL, about your loan closure.

Conclusion

Closing  your instant personal loan account has to be done correctly in order to prevent future legal or credit problems. Ensure you submit your application for closing your Personal Loan in time, pay all applicable fees, to collect all the required documents you will require from the lender, such as the No Objection Certificate (NOC). Be aware and ensure your lender updates the loan closure with the credit bureaus in a timely manner. This way, you can rest assured that you have clean financial records for your future borrowing requirements.

Get in touch with Hero FinCorp to know more about smart loan closure.

Frequently Asked Questions

1. What Is A Regular Loan Closure?

A regular loan closure occurs when you repay your loan by adhering to the EMI due dates outlined in your personal loan agreement. There are no penalties involved if you make all payments on time and complete the loan term.

2. What Is Loan Foreclosure?

Loan foreclosure, or pre-closure, is when you pay off the entire outstanding loan balance at once before the due date. This usually requires that you have paid all EMIs on time for the first twelve months

3. How Do I Obtain A Loan Account Statement?

Request a loan account statement from your lender. It details all EMIs paid to date. Ensure the statement shows a zero balance after your final payment.

4. Is A Cancelled Cheque Necessary For Opening An Equity Account?

Yes, when you open an equity account to trade in securities, you are usually asked to submit a cancelled cheque as part of the KYC process to verify your account details.

5. What documents are required for a Co-Borrower application?

Both applicants must provide identity proof, income documents, bank statements, and credit history for lender verification for a Co-Borrower application Co-Borrower application.

6. What is a Personal Loan closing application?

A Personal Loan closing application is a formal request submitted to your lender to close your Personal Loan account and issue the No Objection Certificate (NOC) and closure documents. 

7. How long does a Personal Loan account take to close? 

The closing of the loan is usually taken care of within a few days after you have repaid your loan and submitted the closing applications; the exact duration needed depends on your lender. 

8. Are there any charges for closing a loan early? 

Yes, a lot of lenders will charge you a pre-closure fee to compensate for the interest earning when you repay your loan before the completion of the tenure.

9. How do I get my No Objection Certificate (NOC)?

Once you have repaid your loan, you can request for your NOC by giving a formal application with the documents required to close your loan. Your lender will verify the repayment and issue you the NOC, likely via post or through a branch visit.

10. What happens if I do not submit a loan closing application? 

If you do not give a formal application to close your loan, your loan account will remain active with your lender and the request for your NOC will be delayed. This may create problems when applying for future loans as well or have an impact on your credit.

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