The last instalment

The last instalment

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.

Car loan: The bank will typically send a list of documents within 15-20 days of the payment. It will send an NoC stating that you have paid the loan and there is no amount outstanding against your name. The bank will also send a letter for the regional transport office and the insurance company stating you have paid off the loan. To get the hypothecation removed from your car’s registration certificate/book, you need to submit the original letter along with your residence proof at the office of the Regional Transport Officer (RTO).

Remember that the RTO office accepts only a select list of documents as proof of residence. This list is displayed at the RTO office. Once you submit the papers, you will receive an acknowledgement slip. The RTO office will take 10-20 working days to give the new registration certificate. Till that time, the acknowledgement slip will suffice for the registration certificate (RC).

You will also need to submit the bank’s letter addressed to the insurance company from the branch office where you got your car insured. The insurer will give you an endorsement for this.

Says A.N. Raju, executive director, Sundaram Finance: “The endorsement on the RC has to be removed after the loan has been repaid. This is very important since this is compulsory when selling the car later. The removal will mean that the car is clear of all charges." The relevant change will appear when you get the insurance renewed.

Home loan: Before the loan was sanctioned, the bank/lending institution would have asked for a list of documents, including your property papers. Once the loan has been paid in full, the bank/lending institution will return these. You need to ensure that you take back all the documents you had submitted. The bank/lending institution will then issue you a letter stating the said property is free from mortgage.

When you took the loan, the bank would have most likely asked you to furnish guarantors. The bank will also issue separate letters to these guarantors, stating that their liability has come to an end as the loan has been paid in full. Only after you receive these documents can you say the property is completely free of mortgage. Further, the bank/lending institution will also send a no-dues letter to the cooperative society/government agency from which you bought the house.

Remember to get an acknowledgment for the last EMI cheque. You will get your documents as soon as the cheque gets cleared. If this process takes more than two weeks, follow it up with the bank. Says Aditi Sanzgiri, manager (retail banking), Saraswat Cooperative Bank: “Cooperative banks collect the final EMI in cash too. We give the documents on the spot."

• Personal loan: Once you have paid the loan in full, the bank will send a letter stating there is no amount outstanding against your name.

Why closure matters

There are many reasons why you need to close a loan. First, it’s a proof you have paid off the loan and there is no amount outstanding against your name. With credit appraisals becoming more scientific, it’s in your interest to keep your track record clean. Second, if the loan was taken to acquire assets such as a home or a car, proper closing of the loan attests that your equity in that particular asset is 100%. This facilitates easy sale of the asset when required.

While closing any line of credit, make sure you keep a copy of the letters you submit at the relevant office. For example, if you submit the NoC letter from the lending institution at the RTO, make sure you keep a copy of the same. After all, it’s in your interest to keep your track record clean.


Irda removes mortality charges from the cap on expenses on Ulips

Both insurers as well as customers have welcomed the Insurance Regulatory and Development Authority’s (Irda’s) decision to remove mortality charges from the cap on expenses on unit-linked insurance plans (Ulips). The inclusion of mortality charge within the overall cap would have restricted the sum assured and also affected children plans. Keeping the charges at bay and providing protection to one and all is set to redefine the structure of Ulips. Capping the yield will make them more advantageous for the customer in the long run. Any Ulip launched after 1 October will need to comply with the guidelines. These guidelines will not apply to existing policyholders, but the existing policies will have to be modified for new customers by 31 December.

Must know

Though you can still use the ATMs of banks other than your own, soon you will be allowed to do so free of cost only up to a certain limit. You would be able to withdraw only up to Rs10,000 every time you use the ATMs of other banks, and only five times a month. Says Indian Banks’ Association (IBA) chief executive K. Unnikrishnan: “For more than five transactions, we propose to charge a fee of Rs20 per transaction. The RBI (Reserve Bank of India) has accepted IBA’s proposal, but it will be implemented only by 15 October. The decision of charging after the fifth transaction in a month would depend on individual banks."

PPF, a good investment option

The interest rate you earn on your Public Provident Fund (PPF) balance is tax-free. In these times, there is no investment product that matches the safety and tax-free status of a PPF. Once your PPF account matures after the mandatory 15 years, it can be extended indefinitely in blocks of five years. During the extension period, you have two options: Continue PPF “without fresh deposits" or “with fresh deposits". If you don’t intend to make fresh deposits, you need not inform the post office or the bank. You can withdraw once a year and the balance continues to earn the prevalent interest rate. If the account is maintained with no fresh deposits for more than a year, you will not be able to use the facility of extending it by a block of five years. You are not allowed to open a fresh account if it already exists, even during the extension period.

Save for your child’s future

The first tool to start saving for your child is a separate savings account or even a recurring deposit if you have surplus funds at the end of every month. It serves as a provisional place to park your savings and cash gifts. Many banks offer children bank facility. For example, Andhra Bank has a kiddy bank account for children up to 18 years. If your child is not yet 10, you become the natural guardian and can open and operate the account. The minimum balance required is Rs100. This account also comes with an option of insurance cover for your child—the premium is as low as Rs55.

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