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 

Factors Lenders Consider Before Issuing a Sanction Letter

Loan providers assess several factors to determine your eligibility for a personal loan and the terms of approval. Here are the key factors

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 organisations 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 online personal loan approval include:

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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.

Why is a Personal Loan Sanction Letter Important?

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 Does a Personal Loan Sanction Letter Contain?

Let us see what a Personal Loan sanction letter usually features:

Loan Application Number

This is a unique number that helps you track the status of your loan application if required.

Loan Amount

The letter shows the loan amount approved by the lender. Based on your eligibility, this may vary from the amount originally applied for.

Rate of Interest

The letter clearly states the rate of interest applicable to the loan, which can be fixed or floating.

Equated Monthly Instalment (EMI)

The sanction letter specifies the monthly instalment amount you will pay and also your  repayment schedule.

Loan Repayment Tenure

The letter shows the loan repayment term (tenure). This can be from a few months to a few years.

Fees and Other Charges

You can find the processing fees, cheque bounce charges and any other fees or penalties in the
sanction letter.

Terms and Conditions

The letter highlights the terms and conditions of the loan, including prepayment penalties and late payment fees.

Validity Period of a 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.
 
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How to Request a Personal Loan Sanction Letter?

To get a Personal Loan sanction letter, you can contact your lender through customer care number, email or visit their branch. You will need your loan application number and identity proof to get a copy of the loan sanction letter.

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.

Conclusion

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.

Frequently Asked Questions

 1. Can I reject a loan after receiving the sanction letter?

Yes, you can reject a loan offer even after receiving the sanction letter. It is a conditional offer so you’re not bound to accept it until you sign the agreement.

2. What happens after receiving the loan sanction letter?

After getting the sanction letter, you must review the terms and conditions.If satisfied, you can accept the offer and sign the agreement.

3. Can I increase the loan amount after receiving the sanction letter?

No, you cannot increase the loan amount after the sanction letter is issued as it is based on your eligibility.

4. Can a Personal Loan be canceled after sanction?

Yes, a Personal Loan can be cancelled after sanction but before disbursal. You can contact your lender immediately as cancellation might involve penalties or processing charges.

Disclaimer: The information provided in this blog post is intended for informational purposes only. The content is based on research and opinions available at the time of writing. While we strive to ensure accuracy, we do not claim to be exhaustive or definitive. Readers are advised to independently verify any details mentioned here, such as specifications, features, and availability, before making any decisions. Hero FinCorp does not take responsibility for any discrepancies, inaccuracies, or changes that may occur after the publication of this blog. The choice to rely on the information presented herein is at the reader's discretion, and we recommend consulting official sources and experts for the most up-to-date and accurate information about the featured products.