How to Use Sanction Letter for Getting the Lowest Interest Rate


24 Nov 2019 | 3 min read

What is a sanction letter? 

A letter issued by the financial institution (Bank’s and NBFC’s) to the applicant, informing them about their loan application, that they will be given the required credit to fulfil the requirement of fund; subject to fulfilling the remaining formalities as prescribed by the Bank or NBFC. 

Difference between loan sanction and loan disbursement

Often one gets confused with the loan sanction and loan disbursement letter while applying for the loan. The fact is there is a wide gap between the two. 


              Loan Sanctioning

            Loan Disbursement

Main purpose

A sanction letter only gives the applicant the guarantee of the loan approval 

Loan disbursement is the final step of the loan process, where the financial institution transfers the final approved amount to the borrower. 

What is it?

The sanctioned amount is the amount, which has been approved by the lender after due diligence. 

The actual disbursed amount is the amount which has been finally disbursed

Validity period

The validity of the loan sanction letter is 6 months. Once that is over, an applicant has to go through the entire process again. The sanction letter states the loan amount, tenure and interest rate among other terms and conditions.

The disbursed amount comes with a disbursement letter which does not have any provision of validity. 

Time horizon

Maximum 48 hrs, as soon as the due diligence is done by the lenders

Can be done immediately after the approval

Interest Rate

Based on credit score and applicants profile

Depends on how much the applicant can negotiate. The interest rate will be applied as on the date of disbursement and not as per the sanction letter.

It is important to note that the sanction letter is not the legal approval of the loan. From organization to organization the validity of the sanction letter varies, on the expiry of which an applicant will have to reapply for the loan and go through the entire loan process.

How Sanction letter will assist in lowering the interest rate on loans?

Usually, most banks offer pre-approved loan to existing as well as new customers. A pre-approved loan makes the process of availing loan a hassle-free experience. The bank evaluates the loan application of the applicant after verifying the financials and sanctions the loan which is valid for a certain tenure of time.  Now the loan can be termed as being pre-approved.

If you are willing to avail loan at low-interest rates, then with the sanction letter you can successfully negotiate the rates with your chosen lender. Since the validity of the sanction letter is for 6 months, you can leverage the time for further consideration of the rates offered by other financial institutions. 

Sanction letter in case of a Business Loan

Suppose Mr.Rakesh, an entrepreneur is in need of a business loan of Rs 20 lakh for 4 years tenure. On applying with a certain bank, he gets the sanction of Rs 15 lakh at higher rate of interest. As per the documents furnished by him, the eligibility for the required amount was not feasible, as per the verification by the lender. The interest rate offered was higher, due to the nature of business.

Mr. Rakesh found the interest rate to be way too high as per market rates. It was not possible for him to avail loan at such a high rate. He was advised by one of his acquaintance, to look for another lender who can offer it at comparatively low-interest rate. Upon negotiating with a few financial institutions, Mr.Rakesh could find himself a better deal, which will be easy on his pocket, in terms of repayment of the debt amount. 

Factors affecting Sanction Letter from Financial Institution 

Sanction letter of loan from financial institutions is an inevitable part of the process. Lenders undertake a tedious process of scrutinizing various documents provided by the borrower to reject or approve the loan. Before sending the sanction letter to the applicant, all the aspects of the loan application are verified to be valid.

If an applicant is unwilling to borrow the funds at the sanctioned rate, he/she has the choice to negotiate the rate with a different lender and avail it at lower interest rate, suiting his pocket.

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