How to pay off car loan early: Your complete guide

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Many of us buy our car on loan but after a point of time, as the vehicle gets older and demands regular maintenance, paying the EMI starts pinching our pocket. How about getting rid of the auto loan so that my monthly expenses for the ageing car gets less and also one can sell it off whenever he/she feels.

How to remove your vehicle's hypothecation at RTO

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The vehicle cannot be sold till it is hypothecated to the bank. Hence, continuing with an auto loan for a period of five to seven years does become a liability for the owner as the vehicle may not be fit to fetch a decent resale value by then.

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But if one decides to pay off the remaining loan on his car at a given point of time, how he/she will proceed on that?

Steps to foreclose an auto loan

STEP 1: Call up the customer care of the bank from which you have taken the loan to know about its loan centres. Only these centres handle the procedure of pre-closing a loan account.

STEP 2: Go to the nearest loan centre and ask the attending official for a loan preclosure form. Sign the form where it is required.

STEP 3: Give the attendant your auto loan account number and he/she will update you about the amount to be paid to foreclose the loan.

STEP 4: The official will produce a statement featuring the foreclosure details. It will include the following items:


A. Principal amount pending on that very date of foreclosing the loan

B. Interest upto that very date (this interest adds up each day; hence if you fail to foreclose the loan on that day and go again the next day to settle the matter, the interest of that will be added)

C. Pre-closure charges on the Principal amount at 5 pe cent rate

D. Service tax of 14.5 per cent on the pre-closure charges (it means 14.5% of the amount calculated in C)

E. Pending EMI on that date

F. Cheque bounce charges (if any)

G. Penal charges (if any)


To give an example, if Mr X has Rs 3,79,593 pending as the Principal amount of the auto loan as on January 16, 2016, he will have to pay the following:
A. Principal Rs 4,00,000
B. Interest up to Jan 16, 2016: Rs 200 (if it doesn't work out on Jan 16 and is foreclosed on Jan 17, then another Rs 200 will be added)
C. Pre-closure charges on Principal (5%) which is Rs 20,000
D. Service tax (14.5% of C) Rs 2900
E. EMI pending Rs 10,000 (suppose)
If there are no cheque bounces and penal charges, then the total amount payable to the bank is Rs 4,33,100 (A+B+C+D+E).


STEP 5: Pay the official this amount (either in cash or cheque) and he will give you a an attested receipt mentioning the following:

  • Loan account number
  • Cheque number and date (in case you have paid in cheque)
  • Bank of which you have issued cheque

STEP 6: The bank will send a letter acknowleding the closure of the loan amount to the address you have provided to it. The letter will also have:

  • No-Objection Certificate (NOC) to the Regional Transport Office (RTO)
  • NOC to the insurance company]
  • Form 35 (in duplicate)

NOCs are valid for 3 months only

NOTE: The NOCs are valid for only three (3) months from the date of issue. If you fail to cancel your hypothecation within that time frame, you have to obtain a fresh NOC from the bank.

Unused PDCs/SPDCs of auto loan

In case you want the unused PDCs/SPDCs to be returned from the bank, then you need to visit the nearest loan centre and request it within 45 days of issuance of the above letter from the bank. If no request is made within that period, the unused PDCs/SPDCs will be destroyed.

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