For most people, paying the last instalment is the end of a loan. However, that’s not enough. For any line of credit you take from a financial institution, a loan account is opened in your name, which needs to be closed once the loan is over.
This account can be closed in three ways. First, you regularly service the loan during the entire course of the tenure. Second, you make windfall gains and use the extra funds to foreclose the account. Third, you get the loan refinanced by a lender offering cheaper rates than the existing one.
Here, we will go into details of the first two.
How to close a loan
• Paying off as per the amortization schedule: Of late, banks have become proactive and send the necessary papers once a loan account is closed. The documents attest that you are, technically, debt-free.
However, if a bank doesn’t, you should call its customer service department and find out the status of your loan account. The loan account number can be found in the amortization schedule the lending institution would have sent after disbursing the loan.
If you are unable to locate the document, request the customer service department for it. You may have to share personal details to get it. You can also approach the branch from where the loan was sanctioned and give it a requisition in writing to locate your loan account number. The lending institution will verify your details and then provide the information.
• Foreclosing a loan: The EMI you pay towards servicing a loan has two components—interest and principal. For you, the interest is the cost paid for taking the loan, but for the lender, the interest is the earnings. While foreclosing, your primary motive should be to reduce the cost of the loan. Since banks lose out on interest income, most levy a prepayment penalty for foreclosing a loan.
Foreclose a loan only if the prepayment penalty is less than the interest saved.
Call the bank’s customer service department or get in touch with the branch concerned. Find out the amount you would need to pay to foreclose it. Ensure that this amount includes the principal outstanding, prepayment penalty, if applicable, and the necessary service charges. Says Sujai Raina, business manager (personal loans and business loans), HDFC Bank: “The customer is given a letter stating the amount to be repaid. This would include the principal amount, interest, foreclosure charges and other charges.”
Also, find out the period within which you can pay this amount and the location where it has to be paid.
The paperwork
Some amount of paperwork is involved while closing a loan.