Monthly expenses can be difficult to manage when trying to live a quality life. Be it to sponsor your next trip, give your house a much-needed revamp, or medical expenses, collecting capital becomes a task. Personal Loans come up for rescue and fill in the gaps in your expenditure. However, Personal Loans require a mandatory legal procedure and cannot be processed without a Personal Loan sanction letter.
Now, what does it mean, and why is it so important? Let’s find out!
What is a Personal Loan sanction letter?
A Personal Loan sanction letter is a legal document you, as the borrower, receive from the lender. This document marks the approval of a loan, mentioning the terms and conditions both parties agree upon. Most Personal Loan sanction letters stay valid for six months from the date of issuance, after which you need to reapply from scratch. But, you are only eligible to receive a sanction letter for a Personal Loan if you meet the below criteria:
Credit score
One of the primary determinants of whether you are eligible for a Personal Loan is your credit score. A credit score above 750 out of 900 is a must for a Personal Loan to be approved, and a higher score not only increases the likelihood of loan approval but may also result in lower interest rates, making the loan more cost-effective over its tenure.
Employment status
A Personal Loan is issued only to salaried or self-employed individuals. In the case of a salaried employee, the minimum tenure spent at the current organisation must be six months. Employment stability is often perceived positively by financial institutions, as it implies a consistent and reliable source of income. With a steady job and a reliable income stream, you qualify as a lower-risk borrower.
Outstanding debt
Lenders closely scrutinise your financial commitments, like outstanding debts such as credit card balances, mortgages, or other loans. This evaluation is crucial in determining your debt-to-income ratio, which measures how much your income goes toward repaying debts.
Income
Depending on your residency, you can expect a minimum income requirement of Rs. 22,000 and above. Lenders evaluate both the amount and stability of the income to ensure whether the borrower has the repaying capacity required for the loan.
What does the sanction letter for a Personal Loan contain?
Here is what an ideal Personal Loan sanction letter format looks like:
Loan application number
After your loan application is approved, the lender generates and sends you a unique loan application number. This number allows you to track the status of your loan.
Loan amount
Depending on your credit score and financial profile, the loan amount is adjusted and mentioned in the letter by the lender. The amount can be lower or higher than the amount asked during the application.
Interest
Whether fixed or floating, the sanction letter mentions the interest rate applicable according to your profile.
EMIs
After the loan is sanctioned, you must pay a calculated Equated Monthly Instalment (EMI), which is mentioned in the letter, to ensure affordability.
Tenure
The letter specifies the duration in which you need to repay the loan with interest. The tenure can vary, and you may have the flexibility to choose a repayment period based on your financial preferences and capabilities.
Other terms and conditions
The letter may include additional terms and conditions related to the loan, such as prepayment penalties, processing fees, and any special clauses you should be aware of.
Also Read: Get your Personal Loan approved in 4 steps
Why is a Personal Loan sanction letter so important?
Assurance and legal standing
Word of mouth has no legal standing in the court of law. The Personal Loan sanction letter is a legal document that assures both you and the lender of safety. It confirms that your loan application has been approved, instilling confidence in your financial plans. The letter outlines the agreed-upon terms and conditions on the lender's side, serving as a contractual agreement between the two parties.
Budgeting and financial planning
Receiving a sanction letter allows you to plan your finances effectively. With precise details on the approved loan amount, interest rate, and repayment terms, individuals can create a budget that accommodates the monthly loan repayments. This foresight helps avoid financial strain and ensures you can meet your repayment obligations without compromising your overall financial stability.
Negotiation and comparison
The sanction letter gives you a concrete offer from the lender, allowing you to negotiate terms before accepting the loan. Additionally, having legal approval enables you to compare offers from different lenders and choose the one that best aligns with your financial goals.
Avoiding misunderstandings
Misunderstandings and disputes between borrowers and lenders can arise if the loan terms are not communicated clearly. The sanction letter mentions all the details about the transaction and hence plays a crucial role in preventing such issues by documenting the agreed-upon terms in writing. This clarity reduces the likelihood of disputes and ensures a smooth borrowing experience for both parties.
Documents required for Personal Loan sanction letter
These are the documents you need for availing your sanction letter:
1. Photo
Passport-size photographs for identity verification
2. Identity proof
PAN card, driver’s licence, passport, or other identification document
3. Address proof
Aadhaar card, electricity bill, gas bill, or other rental agreements
4. Income proof
Salary slips, bank statements, income tax returns, or other documents demonstrate a stable income
5. Employment proof
Offer letter, proof of business, or any document verifying the applicant's current employment status
6. Credit report
A copy of your credit report, providing a comprehensive view of your credit history and score
7. Income Tax Return form
Evidence of your latest taxable income from the recent financial year
Also Read: Understand Personal Loan disbursement process in banks
Conclusion
In conclusion, the Personal Loan sanction letter is a critical document in the Personal Loan application process, providing assurance, clarity, and a legal framework for both borrowers and lenders. Understanding the factors that influence the issuance of this letter and being prepared with the necessary documentation can significantly enhance your chances of securing a Personal Loan that aligns with your financial goals.
Throughout the process, you should know the terms and conditions you agree to and take informed steps in your future financial planning.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
