What is a Sanction letter?


26 Nov 2019 | 5 min read

Mr. Rahul requires a personal loan of Rs 10 lakhs. So, he applied with a particular bank and got the loan approval letter with an interest rate of 13.09%. But he was not satisfied with this interest rate he was getting from the bank. So, he approached another bank for a low-interest rate with the approval letter. Now you must be thinking about what is an approval letter? Well in simpler terms, it’s called a Sanction letter. Let’s have a look at some salient features of the Sanction letter:

  • Sanction Letter is a letter issued by the lender to an applicant who has applied for the loan.
  • This letter authorizes the applicant that he/she is eligible to avail of a certain amount of loan from a lender subject to the fulfilment of certain terms and condition as mentioned in the sanction letter by the lender. 
  • Loans are usually of a substantial amount, a lender needs to ensure that everything is in order. Before giving the final loan agreement, the lender issues a sanction letter, informing that an applicant has been approved for the loan. 
  • Sanction Letter is not issued immediately. After an applicant submits his credentials, lenders conduct due process to verify the documents, income proofs and the other information provided by the applicant. And once the lender gets convinced of the authenticity of the applicant’s credentials, they proceed further with the loan process.  

Below is a list of some key points that are considered by lenders before issuing the sanction letter:

  • The credit history of the applicant
  • Repayment capacity of the applicant
  • Current income of the applicant
  • Whether provided documents are authentic
  • Sources of income of the applicant
  • Outstanding debts, if any

Importance of Sanction Letter

  • Sanction letter is the loan approval letter that comes with a validity
  • It is essential to get a sanction letter to avail a loan
  • Sanction letter can be used to negotiate the lower interest loan
  • It is an important element of loan processing 

Contents of a Loan Sanction Letter

The format of a loan sanction letter might slightly vary from lender to lender. Therefore, it’s important to speak to the concerned customer relationship officer about terms before signing the loan documents. Here are the generic details mentioned in a sanction letter:

  • The sanctioned loan amount 
  • The loan repayment tenure 
  • The applicable type of interest on the loan amount like fixed, floating or hybrid
  • The actual interest rate that is applicable at the time of loan disbursement 
  • The base rate at which the interest is being calculated
  • The applicable EMI and pre-EMI amounts 
  • The validity period of the sanction letter
  • The detailed terms and conditions that the lender desires to incorporate in the loan agreement

The validity of the Sanction Letter

An applicant should remember that a sanction letter is not a legal approval of the loan. They may have to submit further documents and sign the loan agreement before the disbursement of the loan.  The general validity of a sanction letter is about six months and if the loan is not availed during this period, the sanction shall lapse.

Documents Required for a Sanction Letter

The documents are among major things that every lender considers at the time of issuing a sanction letter. However, the list of documents required for a personal loan may differ from one lender to another. Here is a generic list of documents you may need to submit:

  • Completed personal loan application form
  • Proof of address
  • Loan outstanding letter with the track record (If you have any existing loan)
  • Last 3 months bank statement (Passbook for the past 6 months)
  • Form 16
  • Latest salary slips
  • Basic KYC documents like copy of passport, voter ID card, driving license, Aadhaar card
  • Current dated salary certificate 
  • Income tax returns

Lastly, it is important to note that the sanction letter does not mean a legal approval of the loan amount. Before disbursing the loan amount, the applicant has to submit more documents and sign the loan agreement. You must read the sanction letter carefully and if you can’t understand something, you should talk to your financial advisor before submitting the letter and signing the loan agreement.The sanction letter is a crucial document in the loan process and it should be kept securely for future reference. After all, the sanction letter can be your secret sauce to getting a low-interest rate based loan.

Read More: How to Use Sanction Letter for Getting the Lowest Interest Rate

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