Quick Summary:
- Car loan settlement is a process where the borrower pays the outstanding loan amount to the lender in order to close the loan account.
- With proper car loan settlement, borrowers can become debt-free and gain full legal ownership of their vehicle.
- Settling a car loan involves reviewing the loan agreement, calculating the settlement amount, communicating with the lender and making the payment.
- Loan consultants and/or financial advisors can assist you in understanding and working out a viable roadmap when it comes to car loan settlement.
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The process of applying for and getting approved for a car loan in India has become more accessible and affordable. It has made the dream of vehicle ownership into a reality for many. Once a loan is granted, you get to use the car as long as you pay the agreed-upon EMI (equated monthly instalment) regularly. Once the whole loan amount (principal + interest) is paid back, the full ownership of the vehicle is transferred to you.
Sometimes, it might come to pass that the borrower, aka you, is facing financial difficulties and is unable to repay the full loan amount. In such a scenario, you can negotiate with a lender to pay a portion of the outstanding loan as a full and final settlement.
It might also happen that you realise you can pay off the loan ahead of time. This can help you benefit financially. In this case, you have to negotiate with the lender to reduce the foreclosure charges or penalties they will levy on you for closing the loan early. In this article, we will get into the nitty-gritty of the car loan settlement process.
What is a Car Loan Settlement?
A car loan settlement or car finance settlement is a process where you negotiate with the lender to repay a portion of the outstanding loan amount, including the remaining principal, interest, and charges. If the lender accepts this, the outstanding amount is written off and your loan account is marked “settled”. The process involves reviewing your agreement, calculating the pending balance, browsing available settlement options, and making the final payment.
On the other hand, car loan foreclosure means paying the outstanding loan amount via part or full lump sum payments before the due date, making the borrower debt free and monthly EMI payments early. Whether you choose to settle your car loan account or foreclose it early, knowing the right steps can help you. Settling your car loan not only has an effect on your CIBIL score (credit score) but also on your future loan eligibility.
Why Consider Settling Your Car Loan?
It is possible that due to severe financial difficulties, like a job loss, you are unable to pay your car loan EMIs for several months. You would be listed as a defaulter, and the lender will start the process to repossess your car.
Example: You have an outstanding car loan of ₹2 lakh. However, you can make a one-time payment of ₹1 lakh. You can call up your lender, explain your problem, and offer to pay off ₹1 lakh as a one-time final payment. If your lender accepts this, your loan will be marked as settled in their books.
Generally, this option is a last resort for borrowers. They opt for this only after exhausting all other sources. Why is this a last resort? Here are the disadvantages of a car loan settlement:
- Credit bureau negative reporting: When a loan is settled, your account shows “settled” instead of “closed”. This is a negative on your credit report.
- Drop in credit score: A settled loan could result in a drop of anywhere between 75-100 points on your credit score.
- Challenges in future loans: A settled car loan could mean you could face difficulties in getting favourable terms/interest rates for future loans.
- Reduced negotiation power: You will lose negotiating power for future loans with lenders.
- Credit limit challenge: You could face a challenge if you want to increase your credit limit in the future.
- Long-term impact: A settled status could remain on your credit report for up to seven years.
The advantages of a car loan settlement:
Get full ownership of the vehicle
After you completely settle your car loan, you can gain full legal ownership of the vehicle. This means you can sell or transfer the vehicle as you want and when you want, without any restrictions from the lender.
Remove hypothecation
By settling your car loan, you can obtain the NOC from the bank and remove the hypothecation from the vehicle RC. It will act as proof that you are the sole owner of the vehicle. Removal of hypothecation not only facilitates easy vehicle sale and ownership transfer but also reduces complications with insurance, allowing the vehicle to achieve its optimal value in the second-hand market.
Be debt-free
With a settlement on car loan, you will become free from the car loan debt. This will remove your worries about monthly EMI payments. You can then use your funds towards other purchases or investments.
Vehicle repossession
In India, most car loans are basically secured car loans. Typically, the vehicle being purchased is kept as collateral, and in the event the loan defaults, the lender has the right to repossess the vehicle as a way to recover their losses. When you settle your car loan, you eliminate the worry of vehicle repossession by the lender.
How to Start the Car Loan Settlement Process?
Here’s what you need to know about the car loan settlement process:
Reviewing Your Loan Agreement
The very first step you need to take is to gather the details of your loan agreement and carefully review it. Understand every clause and term & condition before proceeding. This includes the full loan tenure, repayment schedule, rate of interest, potential foreclosure or prepayment charges, penalties on delayed or missed monthly payments, etc. If you have any queries, make sure to resolve them by contacting the lender or a loan consultant.
Calculating the Settlement Amount
Once you are done reviewing the loan agreement, negotiate with the lender on the settlement amount. You can get the loan statement from the lender for details of the outstanding balance. You can take help from professionals to help you settle your car loan.
After you have done the calculations, you need to initiate contact with the lender and inform them about your intent to settle the car loan. Seek available settlement options and negotiate. Discuss and confirm the timeline of the loan closure and the payment method. Make sure to obtain all the necessary paperwork for the process beforehand. Then, you can make the payment as per the agreement, get the receipt of acknowledgement and No Dues Certificate (NDC), and close the loan account.
Where to Find Support During the Settlement Process?
If you are feeling overwhelmed with the settlement of car loan process, you can always seek help from professionals. Here are some ways you can get assistance:
Communicate with your lender
An effective way to seek assistance during the car finance settlement process is by reaching out to the lender directly. Whether the lender in question is a bank or an NBFC, they will have a designated customer care and support mechanism, which will connect you with an executive to guide you through the process.
Hire a financial advisor or a loan consultant
In terms of the car loan settlement process, you may seek the professional services of a financial advisor or a loan consultant. After considering your present financial standpoint and reviewing the agreement, they can help you clearly understand the process and give guidance on how to approach the situation.
Securing car loans with Mahindra Finance is easy and safe. We have a dedicated customer care mechanism and several trained personnel who can help resolve your car loan-related queries quickly.
What Challenges Might Arise and How to Address Them?
Here are some common challenges you may face when settling car loans, alongside their solutions:
- Outstanding dues: When settling claims, you may find that the balance amount provided by the lender doesn’t match your calculations due to the inclusion of hidden charges or undisclosed processing fees. So, make sure to ask the lender for detailed and transparent statements and check them thoroughly.
- Delay in documentation: Obtaining documents, like the NDC, from the lender may take some time. So, make sure to ask for the necessary paperwork well in advance.
- High foreclosure charges: Some lenders may charge significant foreclosure fees on early loan settlements as a way to cover their loss. So, do negotiate this charge if possible. It is best to review the loan agreement for such charges before taking the car loan.
Conclusion
Settling a car loan is a crucial step towards becoming debt-free and gaining full legal ownership of your car. You can easily do so via EMI payments as per the loan tenure or with part or full prepayment. When settling a car loan, you must take your time, review the agreement, calculate the amount, seek available options, and then settle it. If you have queries, you can reach out to the lender or take guidance from a financial advisor or loan consultant. It may come with some challenges, like high charges and delayed paperwork, but you can easily counter them if you approach carefully.
Suggested Read: What To Do If You Miss A Car Loan Payment?
FAQs on Car Loan Settlement
Q1. What documents are needed for a car loan settlement?
The original loan agreement, borrower’s KYC paperwork, receipt of loan payments, and pending balance, NDC, vehicle RC, etc., are some examples of documents that may be needed for the car loan settlement process.
Q2. Can I negotiate the settlement amount with my lender?
Yes. You can negotiate with the lender about a potential reduced settlement amount. However, it is not guaranteed and depends on the lender.
Q3. How does settling a car loan affect my credit score?
Settling a car loan could have a negative impact on your credit score. Delayed or missed payments and default on the loan indicate poor financial discipline, which negatively impacts your credit score.
Q4. What fees might I incur during car loan settlement?
When settling a car loan, you may incur some additional fees besides the pending balance, such as foreclosure charges, penalties on late payments (if any), processing charges, etc.
Q5. Are there tax implications when settling a car loan?
For a personal car loan, you cannot claim tax deductions on the principal or interest payments, so its settlement does not affect your taxes. However, if the car is used for business purposes and you have been claiming depreciation and interest as expenses, you should consult a financial advisor or accountant to understand the tax treatment upon settlement and sale of the asset
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