Personal Loan Sanction Letter: Know About Its Meaning and Importance

Understanding the loan process is critical if you require funds and wish to obtain them through a personal loan. The funding process is subdivided into three steps. The first stage is the application stage, in which you submit your information, and the lender performs risk profiling of your portfolio. The sanction stage comes next, followed by the disbursement stage.
 
In this blog, you will learn about the most crucial document the lender sends out during the second stage: the loan sanction letter.
 

What is a loan sanction letter?

 
A personal loan sanction letter is essentially an approval letter from the lender for your requested loan. It contains detailed information about the terms and conditions of the loan. It also includes critical information on the maximum loan amount that you are eligible for, the repayment period, the interest rate, and the EMI amount. Most of these details, you would already know if you have done your negotiation and discussion with the lender. But with the loan sanction letter, the verbal agreement becomes a written one.
 
Some of the crucial information mentioned in the loan sanction letter: 
 

• Processing fees
• Loan application number
• Loan category
• Type of interest rate charged
• Total interest payable 

What factors do lenders consider before providing a personal loan sanction letter?

 
The lender evaluates your profile and looks at various factors to determine your repayment capacity. These are
 

1. Credit history

   Your lender will first look at your credit history or credit score. The lender receives your credit report from the credit agency. In the report, the lender will look at the total number of outstanding debts, the repayment pattern, settlement information, and the number of applications submitted recently (hard inquiries).
    
   If this report is good and there are no negative comments, a sanction letter could be issued quickly.
    

2. Debt-to-income ratio

   The debt-to-income ratio (DTI) tells your lender how much of your monthly income goes toward EMI. If you have a higher income, say Rs 75,000 per month, but pay Rs 60,000 to clear your various monthly debt obligations, your chances of loan rejection are very high.
    
   The lender typically prefers a DTI of less than 50 to approve a loan and send a sanction letter. You can figure out this ratio using the formula below.
    
   DTI: (Total EMI) ÷ (Gross Monthly Income)
    

3. Employment status

   Typically, lenders have different eligibility requirements for salaried and self-employed borrowers. If you work for a government department or multinational corporation, the sanction letter dispatch process will be much faster. The reason is simple – the assurance of payback is higher. These organizations are known for making timely payments and the chances of layoffs are very low. If you work for a start-up or a small business, the lender will be extra cautious when performing credit appraisal and may charge higher interest.
    

4. Additional income

   This is not the most important factor, but it does contribute to quick loan approval. If you are salaried but also work part-time or freelance, the lender will not hesitate to send you a loan sanction letter. Showing multiple sources of income gives the lender added assurance of your pay back capability. In case you do not have an additional income, you can add a co-applicant to your loan application.

Other requirements for quick personal loan approval include:
 

Parameters	Description
Citizenship	Indian Resident
Minimum age	21 years
Maximum age	58 years
Monthly income	Rs 15,000 (monthly)
Work experience	Salaried employee – Six months of continuous employment Self-employed – Two years in the current business
Income statement	Last six months

Also Read: Top 10 Profitable Wholesale Business Ideas for 2022
 

What are the documents required for getting a personal loan sanction letter?

 
You will only need your KYC papers, employment continuity proof, and income proof to get a sanction letter. Here is an explanation of the documents that serve as evidence for the preceding.
 

Mandatory documents	Application form Passport size photograph
Identity proof	Passport PAN card Aadhar card Driver's license
Residence proof	Utility bills Rent agreement Passport Driver's license Aadhar card Ration card
Employment continuity proof	Appointment letter Experience/relieving letter Business registration certificate Shop establishment certificate
Income proof	Salary slips Bank account statement Income tax returns Audited business financials

 

What is the importance of a personal loan sanction letter?

 
Your loan sanction letter is not a legally binding contract between you and the lender. However, it is still very crucial. Here is why. 
 

• The loan sanction letter serves as an acceptance letter. If you accept the terms and conditions and other information on the document, the lender will proceed with the remaining steps required for loan disbursement.
• A sanction letter will assist you in determining whether or not to proceed with your lender. If you applied with two lenders at the same time, this letter will help you compare the offers on the table.
• In the event of multiple applications, you can use this letter to negotiate a lower personal loan interest rate with other lenders.

 

What is the validity period of the personal loan sanction letter?

 
The validity period of the sanction letter differs with lenders. Most financial institutions will proceed with the remaining steps involved in the disbursement process if you respond to this letter within six months from the dispatch date. 
 
If you do not respond within the specified time, the letter will expire, and you will have to make a new loan application and go through the entire application process again, including document submission, application filling, and so on.
 
Also Read: The Rise Of The Instant Personal Loan
 

Why does the lender not directly dispatch the loan agreement letter?

 
The lender always sends the loan sanction letter to your registered email address before dispatching the final loan agreement. The main reason for this is transparency. As previously stated, the letter details every detail affecting your repayment capacity, such as interest rate, EMI, tenure, and so on. If you believe something should have been discussed with the lender beforehand, or if any information is unclear, the sanction letter gives you the opportunity to resolve it through proper communication.
 

To conclude

 
The sanction letter allows you to review the terms and conditions under which your funds will be disbursed. If you believe the letter does not reflect your credit profile, you can renegotiate better terms and get a better deal before the final drafting of your loan agreement. Your loan sanction letter allows you to negotiate processing fees, repayment duration, interest rate, and other fees.