Pre-closure of Car loans

Pre-closure is a facility given by the banks, wherein one can pay off their loan amount in full before the end of the loan tenure. Choosing such an option would be extremely helpful for those individuals who are looking to end their debt rather than paying monthly instalments. Before choosing such an option, you must be aware that such a facility comes with penalty charges about you must be aware of. Besides knowing the penalty charges, you should also look at the various aspects of pre-closing car loans and how it could affect your finances.

When pre-closing your car loan makes sense?

As we have already mentioned, pre-closing comes with a penalty charge. So, before pre-closing your car loan, you must consider the approximate penalty charges involved in doing so. Make sure that the penalty amount should be reasonable compared to the total interest to be paid. 

You should consider to pre-close your loan only when you have paid a few installments, not when you are at the end of the payment term. Doing so will not be a good idea as you will be charged an extra penalty amount.

Calculate pre-closure penalty charges

Remember penalty charges on pre-closure of your car loan may vary from one financial institution to another. Therefore, it is recommended that you must make use of a prepayment calculator to calculate the potential penalty charges. You can find the calculator online on the bank's website or FinTech web portals. 

The procedure to pre-close your car loans

Follow the given below procedure to pre-close your car loan.

Step 1: Firstly, calculate the total repayment amount along with the penalty charges for pre-closure. 

Step 2: Gather all the documents required to pre-close your loan. Some of the important documents that are required include the registration book (RC), insurance certificate, tax certificate, emission certificate, etc.

Step 3: Now, pay the amount to the bank by visiting a branch directly. You can also check with the bank to confirm if you can pay online or not. 

Step 4: After that, you need to collect all the car loan termination documents from the bank. Some of the key documents to be collected after pre-closure of car loans are given below.

  • Post-dated checks given to the financial institution following the loan approval
  • Two copies of the No objection certificate (NOC) from the bank to indicate the removal of hypothecation
  • Form-35 to imply the termination of hypothecation agreement between the bank and the borrower
  • Other documents that are related to your car ownership submitted at the time of loan approval

Step 5: After all the documents have been collected, now you need to visit the Regional Transport Office (RTO) to remove the hypothecation from the car’s registration. For this, you will need to provide a copy of the NOC and Form 35 to your respective RTO. Make sure that you carry all the documents while visiting the RTO office. The documents that you will need include your RC book, license, pollution under control (PUC) certificate, insurance, etc.

Step 6: After that, your RC book will be updated by the RTO stating that the hypothecation is removed from your car. During this period, you could use the RTO acknowledgment receipt in the place of your RC book.

Step 7: Provide a copy of NOC and Form 35 to your car insurer to remove hypothecation from your insurance documents. Once the documents are approved, get the acknowledgment copy provided by the insurer.

Important things to consider before pre-closing your car loan

You need to consider the following things beforehand while opting for pre-closing your car loans.

  • Check the total cost involved in pre-closing your car loan. If you find that the penalty charges are more than the interest charges, it is not a good idea to proceed with the pre-closure.
  • If the penalty charges come out to be higher, in that case, you can invest your money in some other ventures where you could get better returns.
  • Ask your lender if there are any ways to minimize the penalty charges associated with pre-closure.
  • Your credit score may not improve significantly if you pay off the loan early. If your credit score is not that optimum, you might think paying off your loan early will help boost your credit rating. In real, pre-closing your car loan is likely to have very little impact on your credit score.

Pitfalls to avoid while pre-closing your car loan

Here is a list of pitfalls that you must avoid while pre-closing your car loan.

  • The NOC which you have obtained from the bank is typically valid only for 90 days. So, make sure to submit it to the respective RTO before its expiry. 
  • Make sure that the paperwork is filed correctly with the RTO. You must take care of this immediately after clearing off the loan amount. If you miss out on submitting the required documents, hypothecation on your car will not be removed by the RTO.
  • Do not forget to get acknowledgment receipts from the RTO and the insurance company after submitting all the required documents.


Considering all the things we have mentioned here, pre-closing a car loan is not a bad idea if done in the right way. However, you must weigh-in the benefits and costs associated with the process before making the final move.