The need for taking a loan arises when a person needs money to meet his varied financial needs. For instance, to avail an opportunity to buy assets to enhance future income, to reduce expenditure, or to settle a liability.

However, a loan not only makes the borrower liable to repay the amount but also to pay interest on the borrowed amount.

So, in case you have taken a loan while facing shortage of funds, it’s better to repay it as early as possible when you have sufficient funds, to reduce the burden of interest payment.

However, you have to be careful at the time of foreclosing your loan also, to avoid future inconveniences and to maintain a healthy credit score as well.

“People undertake their share of due diligence while taking a loan, but when it comes to closure, people feel so relieved that they often tend to miss out on details which may lead to future issues,” said Nitin Mathur, CEO, Tavaga Advisory Services.

Mathur lists the following points that you should remember while closing a loan:

  • In case of a foreclosure, the borrower must inform the bank and enquire if there are any foreclosure penalties which range from 1 per cent to 5 per cent of the outstanding amount and they should ensure all their original documents are in place.
  • It is normal in the case of home and vehicle loans for the banker to put a lien on the collateral to avoid losses from bad loans. The borrower should visit the office of the authorised body to get the lien removed and should also obtain a NOC (No Objection Certificate) showing that all the dues stand cleared and the lender has no claim over the property.
  • In case of home loans a detailed statement of all the transactions related to the property called the NEC (Non-Encumbrance Certificate) must be obtained to rule out any discrepancies.
  • The borrower needs to ensure that their CIBIL score gets updated which normally takes time to process and negligence may make future borrowing difficult and costly.

“These few things need to be kept in mind while closing a loan. All the documents and deeds should be in the name of the borrower and it should be ensured that the bank or NBFC has no claim on the collateral. These few steps can make the process of closing a loan hassle-free for both parties involved in the process,” said Mathur.

Alok Kumar, Founder & CEO, StockDaddy, lists the steps that you should follow while closing a loan:

  • First of all, information about pre-closure charges because several loan products in the market charge hefty amounts at closure.
  • Secondly, always consult your financial advisor for accounting of the source of funds used for closure as it must be clear in your books before the closure.
  • Then, obtain a NOC from the lender, it ensures that you have duly cleared all the dues and loan is duly closed without any dues or pendency.
  • The next important step is obtaining all the original documents that you submitted while applying for the loan.
  • Last but not the least; make sure your closure of the loan is duly reflected in your CIBIL score as many times due to operational reasons the loan accounts are not closed in the CIBIL database.