How to Close Your Car Loan: Process, NOC, Charges & Tips

What Is Car Loan Closure and Why Does It Matter?

Car loan closure means repaying your car loan in full and completing the necessary formalities with the bank so that you become the sole legal owner of your vehicle, free from any lender’s claim.

When you buy a car with a loan, the vehicle is technically not fully yours until the loan is cleared. The car is hypothecated to the bank, meaning the lender’s name is linked to your Registration Certificate (RC). This gives the bank legal rights over the vehicle until you’ve paid back the entire loan.

Closing the car loan removes this hypothecation. The bank issues a No Objection Certificate (NOC) confirming it has no claim on your car, and you then update your RC at the RTO to reflect yourself as the sole owner.

There are two ways this can happen:

• Regular closure: You pay every EMI as scheduled until the end of the tenure. Once the last EMI is cleared, you request closure from the bank.
• Foreclosure (early closure): You decide to pay off the outstanding loan balance in one go, before the tenure ends. While this saves interest, banks may levy foreclosure charges.

In short, car loan closure is not just about clearing EMIs, it’s the process that gives you full ownership rights over your car.

If you want to know regarding car loan process - here is the Complete Guide to Car Loan Process in India (2025)

What Are the Different Types of Car Loan Closure?

Car loans can be closed in two ways, through regular closure at the end of the tenure or foreclosure/prepayment before the tenure ends.

1. Regular closure: This is the most common method. You pay your EMIs month after month, and once the final EMI is cleared, the bank confirms that your loan account is closed. The process is smooth if you’ve paid on time and maintained a clean record.
2. Foreclosure or prepayment: Sometimes, borrowers may want to finish the loan earlier—say, after receiving a bonus or selling another asset. In this case, you pay the entire remaining loan balance in one lump sum. Banks usually allow this but may charge a prepayment penalty (commonly 2–6% of the outstanding principal).

Both methods lead to loan closure, but the choice depends on your financial situation and whether you value saving interest or spreading out payments.

How Can You Close Your Car Loan Step-by-Step?

Car loan closure involves paying off all dues, collecting closure documents from the bank, and updating your car’s RC to remove the bank’s hypothecation.

Here’s how the process works step by step:

1. Clear outstanding dues: Contact your bank to check if there are any pending EMIs, late fees, or charges. Make the final payment in full.
2. Get acknowledgement: Always collect a written acknowledgement or payment receipt for your last instalment.
3. Obtain closure documents: The bank will issue a loan closure letter and a No Objection Certificate (NOC). These confirm that your loan has been settled.
4. Submit documents to the RTO: Take the NOC and Form 35 (provided by the bank) to the Regional Transport Office to remove the bank’s name from your RC. This step is crucial to update ownership records.
5. Inform your insurer: Once the hypothecation is removed, update your car insurance policy so it reflects only your name as owner.
6. Check your credit score: Within a few weeks, your loan closure should appear on your CIBIL or credit report. This positively impacts your profile and improves eligibility for future loans.

Skipping any of these steps can cause problems later, for example, selling your car without hypothecation removal can be legally tricky.

What Documents Do You Need for Car Loan Closure?

The main documents required for car loan closure include the NOC from your bank, loan closure letter, Form 35, RC, insurance papers, and your ID proof.

Here’s a checklist to keep handy:

1. Loan closure letter: Issued by the bank to certify that the loan is fully repaid.
2. No Objection Certificate (NOC): The bank’s official confirmation that it has no claim on your car.
3. Form 35: Mandatory RTO form for removing hypothecation, provided by the bank.
4. Car Registration Certificate (RC): Original RC where hypothecation needs to be cancelled.
5. Car insurance documents: Updated policy required at the RTO.
6. ID proof: PAN card, Aadhaar, or driving license.

Tip: Keep multiple copies (physical and digital) of these documents. They may be needed in the future, especially if you decide to sell the car.

Read: Documents Required for New Car Loan

What Are the Charges for Closing a Car Loan?

Regular closure of a car loan usually has no extra charges, but foreclosure may attract prepayment penalties ranging from 2-6% of the outstanding balance.

• Regular closure: You pay all EMIs until the end of tenure. Once the final instalment is cleared, there are no additional charges.
• Foreclosure charges: If you close the loan early, banks often levy a penalty. This is typically 2–6% of the outstanding principal. For example, if you still owe ₹3,00,000 and your foreclosure charge is 3%, you’ll pay an extra ₹9,000.
• Lock-in periods: Many banks have a lock-in of 6–12 months, during which you cannot foreclose the loan. This is usually mentioned in your loan agreement.

Always confirm with your bank before planning a foreclosure, as terms differ across lenders.

What Is the Difference Between Car Loan Prepayment & Foreclosure?

Both mean early repayment, but prepayment can be partial (paying a lump sum to reduce EMIs or tenure), while foreclosure means closing the loan in full before the end of tenure.

Here’s how they differ:

Example: If your outstanding car loan is ₹5 lakh, and you prepay ₹1 lakh, your EMI may reduce or tenure may shorten. But if you foreclose, you pay the full ₹5 lakh plus charges and close the loan entirely.

How Do You Remove Bank Hypothecation from Your Car RC?

Once your car loan is closed, one of the most important steps is removing the bank’s name (hypothecation) from your car’s Registration Certificate (RC). Until you do this, the bank is still officially linked to your car.

Steps for RC update:

1. Collect No Objection Certificate (NOC) and Form 35 from your bank.
2. Visit your Regional Transport Office (RTO) with:
3. Original RC, Insurance copy, Pollution Under Control (PUC) certificate, NOC and Form 35.
4. Pay the applicable processing fee at the RTO.
5. Submit documents for hypothecation removal.

Timeline: RTO usually takes 2–4 weeks to issue the updated RC without hypothecation. Some states also allow online hypothecation removal for faster processing.

Tip: Update your car insurance policy with the new RC details to ensure smooth claims in the future.

Read: Guide to Car Loan Hypothecation and how it works.

How Long Does the Full Car Loan Closure Process Take?

Banks take 1-3 weeks to issue NOC and closure documents; RTO may take 2-4 weeks to update the RC.

Step-wise breakdown:

• Bank: After your final payment, the bank typically takes 7-21 days to issue the NOC and loan closure letter.
• RTO: Hypothecation removal usually takes 2-4 weeks depending on your state’s process.
• Insurance: Updating the hypothecation in your policy can be done in 2-5 business days once you submit the updated RC.
• Credit bureau (CIBIL): Loan closure generally reflects in your credit report within 30-45 days.

So, from final EMI to fully updated records, expect 4-8 weeks for the complete loan closure cycle.

Why Should You Close Your Car Loan Early?

Closing a car loan early saves on interest, frees up monthly EMI, improves your credit profile, and gives you complete ownership of your vehicle.

Key benefits:

• Save on interest: By foreclosing, you stop paying future interest and reduce your overall loan cost.
• Free up monthly EMI: The amount you used to pay as EMI can be redirected to savings or other needs.
• Improve credit profile: A successfully closed loan reflects positively on your credit score, boosting your eligibility for future loans.
• Full ownership of vehicle: Once the loan is closed and hypothecation removed, the car legally belongs only to you, making resale or transfer easier.

How Does Car Loan Closure Affect Your CIBIL Score?

Timely closure of a car loan improves your CIBIL score. Foreclosure also helps, though partial prepayments don’t close the account, they only improve repayment ability.

• On-time regular closure: Shows repayment discipline, which boosts your creditworthiness.
• Foreclosure: Improves your credit health by reducing debt exposure, though it slightly shortens your credit history.
• Partial prepayments: While they reduce outstanding balance, the loan account stays active until full closure, so the effect is moderate.

Overall, loan closure is one of the strongest ways to signal financial reliability to future lenders.

Read - Electric Vehicle (EV) Car Loan: The Complete Guide

What Common Mistakes Should You Avoid After Closing Your Car Loan?

Borrowers often forget to collect the NOC, update the RC, or inform their insurer, which can cause issues later.

Mistakes to watch out for:

1. Not collecting NOC: Without this, you cannot update your RC or prove the loan is closed.
2. Skipping hypothecation removal: If you sell your car without updating RC, the bank will still appear as co-owner.
3. Ignoring insurance update: Hypothecation must be removed from the insurance policy as well.
4. Not checking CIBIL: If closure isn’t updated in your credit report, it may show as active debt and reduce your score.

Frequently Asked Questions on Car Loan Closure

Q: What is the difference between regular closure and foreclosure of a car loan?

A: Regular closure happens at the end of tenure after all EMIs are paid; foreclosure happens when you pay the full balance early.

Q: What is an NOC in car loan closure?

A: A No Objection Certificate (NOC) is issued by the bank to confirm it has no claim on your vehicle after the loan is closed.

Q: How long does it take to close a car loan?

A: Banks issue closure documents in 1-3 weeks, and the RTO takes 2-4 weeks to update RC. The full process may take up to 8 weeks.

Q: Are there foreclosure charges for closing a car loan early?

A: Yes, most banks charge 2-6% of the outstanding balance if you foreclose before tenure ends.

Q: Do I need to visit the RTO after car loan closure?

A: Yes, to remove the bank’s name from your RC and update ownership records, you must submit NOC and Form 35 at the RTO.

Q: How does car loan closure affect my CIBIL score?

A: It improves your score by showing repayment discipline and reducing outstanding debt.

Q: Can I partially prepay my car loan instead of full closure?

A: Yes. Partial prepayment reduces EMI burden or shortens tenure, but it doesn’t close the loan account.

Q: Is foreclosure allowed anytime, or only after a lock-in period?

A: Most banks have a lock-in period of 6-12 months before you’re allowed to foreclose. Check your loan agreement for exact terms.