What is a Personal Loan Sanction Letter and its Importance

When you apply for a personal loan, the first formal step that a bank or a non-banking financial corporation (NBFC) takes to greenlight your application is a loan sanction letter.

While not the official loan agreement, this letter can be viewed as a proof of the lender deeming the borrower credit-worthy. This letter of approval from your would-be lender is the first step in the loan disbursement process.

What does a personal loan sanction letter contain?

The loan sanction letter will spell out the details of the loan and the conditions under which the facility will be extended to you.

Apart from the details of the borrower (you), the letter will also mention the approved loan amount, interest rate offered, repayment tenure, EMI amount, as well as the loan processing fee (if any).

It will also contain:

• Your personal loan application number
• The loan category under which credit is being offered to you
• Whether the interest would be of fixed or floating type
• Base rate for calculating the interest on the loan

Getting the loan sanction letter is a crucial step

As the loan sanction letter is an intermediate step and not the final agreement, in case you are unhappy with any of the conditions specified in it, you can try and renegotiate the terms with your lender.

You should also flag off any errors that you notice in the letter.

Just to be more prepared to know what’s coming your way, experts suggest that you should always calculate your personal loan eligibility before submitting your application to a bank or NBFC. This has another advantage, too – in case your eligibility is not up to the mark for any reason, you could take some time to improve it and then submit your loan application. E.g., you could take care of any uncleared debts that you may have, as these will definitely lower your credit score.

In addition, you must also use a trusted online EMI calculator to get an idea of the amount that you will be required to pay for a given loan amount, interest rate, and repayment tenure. Usually, for a personal loan, the repayment window is 1 year to 60 months.

You’re still away from the final loan agreement

After reading the letter with a careful eye, decide if you agree with all the terms and conditions mentioned in it.

Your personal loan sanction letter will come with a validity period – usually no longer than 6 months.

To take the loan grant process further, you will need to demonstrate your acceptance of the loan sanction letter within the validity window and submit all the documents required for the next stage of the process.

The bank will draw up the final loan agreement only after verifying all your submitted documents.

Factors considered before issuing a loan sanction letter

As soon as a bank / NBFC receives an application for a personal loan, they first conduct a financial background / history check on the applicant. Some of the factors that they look at in India are:

• Your nationality: You need to be an Indian.
• Your age: There are slightly different age bands from lender to lender and also for salaried and self-employed individuals. Usually, the borrowers need to be at least in their early-to-mid twenties and should not be older than 70 years.
• Your credit history and CIBIL score: A credit score of over 750 is desired.
• Your employment / income status: As a salaried individual, you should be able to show at least 3 years of stable and continuous work experience. Self-employed persons should be able to demonstrate a minimum of 5 years of business continuity.
• All the sources of income you have: This will be crucial in determining your debt-to-income ratio or your ability to repay the loan.
• If you have any other active loans: Try to close previous loans before applying for a new one (unless it’s a Top-up Loan)
• The genuineness of all your documentation: The lender will scrutinize and verify all the documents that you submit before greenlighting your loan application.

Documents you need to submit to get your loan sanction letter

You will need to submit the following to your bank:

• The KYC documents
• Proof of employment / business
• In case of employment, salary slips of past few months will have to be produced
• Self-employed individuals need to submit balance sheets of their business as well as income tax return documents
• Bank account statements of past few months
• Any other document that your lender requests

Why can’t you directly get a final loan agreement?

Loan application appraisal, approval and grant are delicate processes requiring a careful study of a borrower’s credit-related background and current financial robustness.

From the lender’s perspective, a loan sanction letter is a chance to spell out all of the bank’s conditions while offering the loan. It also doesn’t bind the bank to grant the loan, giving them further opportunity to scrutinize the borrower’s case after additional documents are submitted.

From a borrower’s perspective, too, a sanction letter works well. Firstly, it is a nod to their loan application. Secondly, it gives the borrower a chance to carefully study the conditions under which his/her credit application is being approved. Till the time the final loan agreement is drawn up, there are possibilities to renegotiate these terms and secure a better deal, i.e., lower interest rate, longer loan repayment tenure, reduction in processing fee, and so on.