What Is A Personal loan Sanction Letter? Why Is It Important?

A personal loan is one of the easiest ways of getting ready cash when one is falling short of money to meet an emergency expense. The best thing about a personal loan is that it can be availed without collateral and with minimal paperwork.

Moreover, most good lenders now make the entire process online and seamless and a borrower can apply for the loan and have it disbursed in his or her bank account without even having to visit the lender’s branch or office.

Since personal loans are uncollateralized, lenders typically gauge a person’s creditworthiness from their past history of debt repayments as well as their CIBIL score. The CIBIL score is a three-digit number ranging from 300 to 900, which indicates to the lender how financially prudent the borrower has been and if he or she is a risky client who may delay repayment or default on the loan.

Personal Loan Sanction Letter

When a personal loan is approved, the lender typically issues a sanction letter after the borrower has submitted all the necessary documents and has met the eligibility criteria for obtaining the loan.

The sanction letter is one of the most important pieces of paper in the entire approval process of the personal loan. The issuance of a sanction letter is basically the first step when it comes to the approval process. Through the sanction letter the lender informs the borrower about the loan amount approved, the tenor, rate of interest, repayment terms, EMI and also the processing fees, which is usually charged upfront by lenders.

To be clear though, a sanction letter is not the final loan agreement and the borrower needs to agree to the terms in the sanction letter before the loan is finally disbursed. The borrower also has to provide all the relevant documents which are then verified by the lender, before the loan is disbursed.

While Issuing A Sanction Letter, Lenders Consider The Following Details:

1. The debt-to-income ratio of the applicant
2. The applicant’s CIBIL score and credit history
3. The employment and income status of the borrower
4. The various sources of income of the borrower
5. All the outstanding debts that the borrower may be servicing
6. The authenticity of the documents submitted

A Sanction Letter Is Basically:

1. A letter of acceptance with a certain validity
2. The first step in the loan approval process, which finally leads to disbursement
3. A tool that can also help a borrower negotiate better terms for the loan with another lender who may be competing with the one that has issued the sanction letter.

A Sanction Letter Contains The Following Details:

1. Personal loan application number
2. Loan category
3. Name and address of the borrower
4. Sanctioned loan amount
5. Accepted tenure of loan
6. Interest rate and interest type (floating or fixed)
7. EMI details
8. Processing fees and other charges, if any

Documents Needed To Obtain A Sanction Letter:

1. An application form duly filled
2. Identity proofs and know-your-customer details
3. Address proof
4. Six months’ bank account statements
5. Three months’ salary slips or last two years’ proof of business income for self employed
6. Income tax returns

Conclusion

The sanction letter is a key document when it comes to the process of approval of a personal loan. Although it is not a legally binding document, a sanction letter lists out the terms at which the loan is being offered, in black and white.

Once you have the sanction letter, you need to provide documents and may need to undergo other verification and background checks by the lender, before the personal loan is disbursed.

As a borrower, once you get the sanction letter you need to go over it thoroughly and point any errors out to the lender before the loan is disbursed.