The biggest mistake you make while dealing with your car loan is at the end–when you pay the last equated monthly instalment (EMI). That is because, you are relieved and happy that the loan is off your head and think (just think!) the car belongs to you. In reality, it is not that simple, because on paper the vehicle still belongs to the lender unless you take a few steps and tie the loose ends.
Following are a few steps you need to take to ensure you are not making the same mistake many make ignorantly.
Step 1: Ideally, once you pay the final EMI of your car loan, the bank should send you the closing documents within two weeks. These documents include a no-objection certificate, or NOC, stating that there is no amount outstanding towards the loan. But, there is a good possibility that you will have to go after the bank to get the NOC.
Step 2: “When you buy a car via a loan, the car is hypothecated to the lender. And, this hypothecation is an endorsement in your car’s registration book,” says Pankaj Mathpal, Certified Financial Planner. An endorsement basically bars you from selling the car. Ideally, the bank has to send you an NOC, as mentioned above, as well as the letter to your Regional Transport Office, or RTO, and the car insurance company, informing them that the loan has been paid off by you in total. But again that is just in ideal world, while in the real world, you will have to go to your RTO and submit the NOC, to get this hypothecation removed.
Step 3: You will need to submit the NOC to the insurance company from where you bought the auto insurance as well.
Step 4: Do remember to carry with you a copy of your address proof along with the NOC from banks and copy of insurance papers to the RTO, or you will have to make a second trip to the RTO.
Once you submit the papers and the form for removal of the financier’s endorsement, the RTO gives you an acknowledgement receipt. You can use this receipt as the RC book, because it is only after a good two to three weeks that you will receive your RC book, with your name as owner and a stamp that hypothecation and endorsement have been removed.
When: You need to get these steps done as soon as you pay the last EMI. “If you wait too long and later on there is an insurance claim to be made, you will be fighting two battles at one time — getting the claim amount as well as closing the car loan,” says Mathpal. For instance, if your car is stolen and you file the claim with the insurance company, since the owner on the RC book is still the lender (even when you’ve paid the loan fully), it will complicate matters. And you will have to close the loan properly before getting any kind of claim money from the insurer.
You will have to ensure the loan is closed even when you have to sell the car, so the sooner you get the loose ends tied up, the better. Not to mention, there is a good possibility that your credit report might show this loan as zero outstanding but as an active loan. And, more the number of active loans on your credit report is equal to a marginally lesser credit score.
So, now that you know about the dumb mistake of not closing car loan properly, make sure you take the right steps as soon as possible. After all, a stitch in time, saves nine.