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The process of loan foreclosure for a two-wheeler loan

The process of loan foreclosure for a two-wheeler loan

Loans by Team Drivio | Mar 11, 2023

A two-wheeler loan comes in handy while financing your motorcycle. While obtaining a loan, you enter into an agreement with your lender regarding your repayment. Accordingly, you must be paying an EMI each month, and are all set to close the loan at the end of its tenure.

However, there are times when borrowers have more disposable income in their hands. If you are financially better poised, you may think of prepaying the loan. This is known as loan foreclosure, where you pay off all your dues to the lender and close your loan before the agreed period. In the process, you can save money as you won’t be paying the interest on the remaining liabilities for the rest of the loan tenure.

It pays to understand the loan prepayment process, as well as the perks and drawbacks of making such a decision. We have got you covered with relevant information in this article.

What is loan foreclosure?

As a borrower, you are liable to pay off the loan amount within the agreed tenure according to the loan terms. At times, people enjoy a change in their financial stature, thanks to new job opportunities, promotions, incentives, or property inheritance. This boosts the repayment capacity of the person. He or she may have more funds than anticipated in hands to pay off the loan. If this is your case, you can make a single payment to prepay your liabilities and close the two-wheeler loan.

Most banks and NBFCs charge a small prepayment charge. However, you might be lucky to find trusted lenders who won’t charge anything if you decide to go for a loan foreclosure for your two-wheeler loan.

How to foreclose your two-wheeler loan?

Now let’s take a look at the loan prepayment process, which should be common for most banks and NBFCs.

  1. Get the foreclosure form and arrange the documents

In the first place, you need to convey to your lender that you are willing to foreclose the loan. Accordingly, they will request you to fill up a form physically or online. 

Take care, as some lenders might penalize you for prepaying the loan. In other cases, they charge a processing fee. 

Once you inform the creditor about your decision and they accept your proposal, furnish your documents like DD, cheque, or ID proof along with the loan account number. At the same time, collect all your documents that the financial institution or NBFC has been holding.

  1. Clear your dues and obtain an NOC

Factoring in the penalties and processing fee, clear all the dues. The penalty is generally between 1% to 5%, which is much lower than the interest you are currently paying on your loan. Once you clear your dues, ask for an NOC from your lender. This is a crucial step, given that the ownership of your two-wheeler lies with the creditor unless you fully repay your loan. So, when you obtain an NOC, the ownership of the motorcycle gets transferred to you. 

  1. Request for lien removal and legal clearance certificate

 At the time of your two-wheeler loan application, your bank or NBFC would create a lien on the motorcycle. They register the relevant documents at the office of the local registrar. When you apply for loan foreclosure, you should request your bank to get the lien removed from the registrar’s office. You are then free to sell your motorcycle, or even leverage the asset to raise another loan.

It’s important to remove the lien, as it implies that your bank or NBFC doesn’t have any claim on it. Obtaining a legal clearance secures your position as the sole owner of the two-wheeler. It also confirms that you no longer have any outstanding liabilities. Also, obtain an Encumbrance Certificate (EC) after removing the lien.

  1. Retrieve post-dated cheques and original documents

Your lender, while processing your two-wheeler loan, would request you to submit a few original documents. This generally includes the papers of your motorcycle, like the bill of sale. Once you prepay the loan and obtain the NOC, make sure to collect all the original documents you had submitted.

Make sure that you sign the letter of acknowledgement only after receiving these documents. In case any issue arises later on, you cannot hold the creditor liable. In case you provided your lender with post-dated cheques, retrieve the as well.

  1. Check your credit report

 After completing the formalities, check your credit report to ensure that the bank or NBFC has made the necessary updates to the finance bureaus. Making this update can take a few days. You might see the changes reflecting in your credit report after a month or two. In case the bank fails to update your credit report, your score might be affected. 

On the other hand, an early loan closure can boost your credit score as it reflects your financial responsibilities. With your credit report updated, you would be in a position to obtain higher loan amounts.

  1. Ask for a final loan statement

Obtain a final loan statement after you close the loan. This statement should have relevant details like loan amount, dates, payments, and outstanding payments, if any. Besides, the final loan statement should mention the date when you closed the loan.


 Before you finalize your loan foreclosure decision, carefully evaluate your savings. If you are just a few months from closing your loan as per the original agreement and the foreclosure charges look high, it’s wise not to prepay your two-wheeler loan. A strategic approach on your end will help you save on your interest. It pays to check out banks and NBFCs with the least loan foreclosure charges before applying for credit.