Remember to take important documents like no dues certificate, statement of account and others from different lenders.
While taking a home or car or personal loan, people do a lot of due diligence in terms of shopping for rates on offer, prepayment penalties, etc. However, the same isn't done by many while closing the loan.
It is a common misconception that once the loan is repaid or pre-closed, the borrower's obligation is over. In fact, if the borrower does not have a No Dues Certificate (NDC) from the lender, they cannot prove that they are free of obligation to any entity including other banks.
Banks issue a No Due Certificate (NDC) or Closure Letter while closing loans stating that the loan stands closed.
Some banks also issue a separate Statement of Account (SoA) along with this. These need to be kept safe for years after closing the loan because they are valid legal records that prove that the loan is closed and the repayments are correct.
If there happen to be any errors in the credit score, this can be corrected by producing the SoA. The SoA issued by the bank is proof that the payments have been made on time.
Non-receipt of NDC from lender: Some lenders issue NDC on the spot, if the pre-closure is made by paying cash. In case it is made through a cheque, or if the loan closes automatically when the tenure gets over, the bank sends this letter to the borrower's address and s/he is supposed to collect the original documents from the bank, if any.
If it is not received due to a change of address or for any other reason, one should enquire about it with the bank and collect it immediately.
In case the NDC for a closed loan is not collected from the bank, or is misplaced, one should approach the bank for getting a duplicate copy.
Banks can help you with this, but if the loan was closed long ago, it may take a few weeks to get the copy. Sometimes, this may require rigorous follow-up for weeks.
Other banks know about your closed loans: Usually, most banks take one to two year's bank statements of the borrower for sanctioning a loan.
If any equated monthly installment (EMI) payments are reflected in the bank statements, they would ask for a statement of that loan. The credit report of the borrower also reveals all loans held by him currently as well as previously.
Other formalities to be observed after loan closure
These vary depending on the loan type:
Home loan: Update the Encumbrance Certificate (EC) by removing the mortgage.
One can produce a copy of the closure letter and put in a written request for the same at the Registrar Office (RO).
An EC is evidence that the property is free from any monetary and legal liabilities, and that the property can be sold as a free title.
Also, recover all important documents that were submitted to the lender at the time of availing the loan.
Sometimes, if the bank is unsure about the borrower's repayment ability, it might register the mortgage document at the RO and put a lien on the property. Approach the RO to get the lien removed. Lien is the legal right of a creditor to sell the collateral property of a debtor who fails to meet the obligations of a loan contract
Loan against property: The procedures here are the same as that of a home loan. If it is a registered mortgage, re-registering of the property is required.
Car loan: Apart from banks, one has to approach the regional transport office (RTO) for closing a car loan. Since the vehicle is in the bank's name, the latter's name was endorsed on the registration certificate (RC), and you will need to change this after closure of the car loan.
Update the RC book at the RTO and the auto insurance (from the insurance company) by removing the hypothecation.
A copy of the closure letter and a written request for the same at the respective offices is required for this purpose.
Hypothecation is a practice where a borrower pledges collateral to secure a debt. While the borrower retains ownership of the collateral, the creditor has the right to seize possession if the borrower defaults.
Personal, credit card and other loans: The procedure of closure ends with obtaining the Closure Letter (or NDC) and unused cheque leaves, if any.
After closing any loan, it is a good idea to know the credit score, to ensure that there are no errors. This is not mandatory, but recommended if one is likely to take any other loans within one to two years. For instance, while closing out a home loan, the individual can request the bank or the housing finance company to inform CIBIL about his or her loan closure.
This could take about 30 days. Once the bank informs you that the CIBIL database has been updated, you can directly approach CIBIL for the updated credit score.
REASONS TO RETAIN NO DUES CERTIFICATE
It is a legal proof for closure of a loan
It is required for endorsing property documents (in case of a home loan) and vehicle documents (in case of a car loan)
It is required to be produced in case of any possible disputes with the bank in future
If there are any errors in the credit report, the NDC can be used to get the errors rectified
It ensures a hassle-free process for all other loans the borrower may take in the near future
For selling of a property or car, this needs to be handed over to the seller if he is taking the loan route
It is required for filing any claim with the insurance company
The writer is CEO, BankBazaar.
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