Buying our first car is a life milestone. The day we get the keys to our vehicle marks a new phase of freedom. But the last thing you need is the weight of a Car Loan holding you back.
Let’s face the facts. Car Loans are the catalyst that allow you to own a vehicle early on in your career. Having to pay the entire amount upfront would deter many people from pursuing this dream.
Paying off the loan as quickly as possible is the ideal approach. However, it is crucial to be mindful of any prepayment charges that may apply.
The importance of foreclosure and pre-closure in Car Loan repayment
Imagine a situation where you suddenly get a large sum of money. You could use that to pay off your Car Loan early and become debt-free. In most cases, you will also be able to save on your Car Loan interest rate.
Most lenders allow you to pay off the outstanding loan amount before the loan's scheduled end date. This process is known as foreclosure or pre-closure. There may be a small charge involved for foreclosure. This amount varies from lender to lender.
Also Read: [How to pay your Car Loan early]
Car Loan foreclosure procedure
1. Inform the lender: The first step is to inform the lender about your intention. In most cases, you will be asked to submit a written application.
2. Pay the outstanding amount: The lender computes the outstanding loan, accounting for additional charges. This final sum represents the amount you need to settle to close the loan.
3. Obtain a No Objection Certificate: After receiving the payment, the lender will issue a No Objection Certificate stating that the Car Loan has been successfully closed.
Car Loan prepayment
Although prepayment and foreclosure are often used interchangeably, they are slightly different. Prepayment refers to partial payments towards the loan to decrease the outstanding amount.
You do not need to pay the entire amount in one go. Instead, you make periodic payments to close the loan faster.
Car Loan foreclosure charges
While foreclosure allows you to close the loan before the scheduled tenure, it often comes with a penalty. Lenders levy this charge to compensate for the interest they lose if the loan is repaid earlier than expected. The foreclosure penalty is usually a percentage of the outstanding loan amount and varies from lender to lender.
Axis Bank charges 5% of the outstanding amount for foreclosure or Prepayment of Car Loans.
Also Read: [Personal Loan Foreclosure: What You Need to Know]
Important points to consider before pre-closing your Car Loan
- Calculate savings: Evaluate how much you can save on interest payments by closing the loan early. Sometimes, the savings might not justify the charges.
- Evaluate other investments: Instead of prepaying the Car Loan, you can consider investing the money in other avenues offering better returns. Thus, you can maximise your savings and use them to pay off the loan at maturity.
- Use EMI Calculators: Car Loan EMI Calculators can help you get a clear picture of your outstanding loan amount and simulate different prepayment scenarios.
Conclusion
Opting for a Car Loan can be a convenient way to own your dream vehicle. But you should think carefully before deciding to prepay or foreclose your Car Loans. While being debt-free is an attractive prospect, you must weigh the costs and benefits associated with such actions. Do not just jump in, before considering the impact.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision
