While researching the loan rates, I encountered an interesting topic that can really help beginners who are willing to take a loan from a bank.
But did you ever came across the word “Sanction letter“? And if you haven’t don’t worry I will cover everything from examples to benefits.
By the way, in another form sanction letter is also known as Approval letter or प्रतिबंध in hindi.
What is a sanction letter in simple words?
Sanction letter is a loan’s terms and conditions letter issued by a bank or a non-banking institution to make you sign for the approval of a loan.
This letter is not issued immediately, first your documents are required to be submitted to verify the bank’s minimal loan eligibility for an applicant i.e loan receiver.
Imagine you as an individual needs some funds for your reasons but to avail the loan from the bank you pay a visit and notice that they tell you to submit some basic documents.
After some days of verifying your eligibility the bank issues you a “sanction letter“. But after reading the letter carefully, if the loan amount you have requested is the same but with a higher interest rate, you can change your lender(bank) and ask for their lower interest rates.
Benefits of sanction letter
The important point to remember as to why should a bank consider such a letter and that is due to a personalized loan because every individual has a different need and needs to be satisfied.
- Negotiating for lower interest rates.
- This letter lapse after the a certain validity.
- This also acts as an approval letter, so the applicant can still go for the final letter to opt for the loan.
- Most important letter among the loan stages
- This letter is a legal proof of an applicant who is eligible for a loan.
Documents submitted before issuing sanction letter
Bank doesn’t issue the letter to sign, not before you submit the below documents to be verified for your loan such as-
- Address and Id proof – Addhar Card, PAN Card, Voter Id.
- Verification – Passport size photo of the borrower.
- Income proof – Latest salary slip, last 3 months bank account statement, income tax form-16.
- Others – Credit scores, Previous or outstanding loan if any.
Note: these documents may change as per the lender and the loan type.
Documents lenders check before pre-approval
Why you need to know these things? because it would help you a lot to make sure you get approval on the first time by taking care on theses things.
- They check credit scores (pro tip: try to get 750 as minimum score as it helps you get lower interest rates on your loan)
- They check your loan repayment capability (pro tip: showing legit higher income or adding any earning member)
- They want authentic documents (pro tip: don’t try to show a illegal or abstract document, verification on spot is done)
- Source of Income (pro tip: legal documents of your business like GST registration or any)
What to check on Sanction Letter?
- Loan Amount
- Note the loan amount that had been requested by you has been mentioned accurately.
- Bank’s policy has a maximum tenure and the tenure that has been requested is mentioned.
- Monthly EMI
- If the EMI amount is issued at a rate that might increase or decrease according to the benefits that the bank gets.
- Base Rate Calculation
- The base rate is calculated on taking a interest rate as a initial value, the borrower needs to check on which basis the charges are being charged.
- The borrower/applicant also needs to check the validity of the sanction letter issued so it could be delivered to the bank before it gets lapse.
- Change in Monthly installments
- Change occurs in monthly payments when the bank decides to raise the interest rate. It is also possible that the Repo rate is changed that RBI provides to the bank as an interest rate. The rate at which bank decided the (interest rate), may change according to the financial position of a country to maintain stable liquidity.
- Change in period
- If an amount issued at a lower interest rate, rate of interest increases after a month or a year then the monthly EMI also increases with an increase in the interest rate and if the monthly payment is delayed or decreased in amount then the period also increases.
- Change in Interest Rates
- Yes, the bank also confirms that as a statement that their interest rates may change as per the economy of a country.
- Mode of Payment
- If the borrower pays using a specified mode such as cheque, bank transfer, or automatic payment method he/she shouldn’t miss the payment date to avoid penal charges.
- If the borrower takes a high valued loan, generally the bank ask for guarantor to gaureentee the unpaid amount are paid to the bank, if the borrower expires or unable to pay the amount as dated. Note, bank also separately checks the asset and loan repaying capability of the guarantor.
- Takeover Charges
- If the loan with the existing bank is not getting suitable, the borrower could choose to change the current bank and to change to another bank, the current bank levies extra charges over it. However, if they charge it would be mentioned there, banks usually charge 0.25 – 1% of the loan amount.
- Penalty Charges
- Penalty charges are levied if the borrower violates the bank’s terms and conditions that are mentioned. If the borrower misses any of the installments or misses updating any of the quarterly or semi-quarterly documents to the bank this charge may add up.
- Pre-payment Charges
- This kind of charge is levied when a borrower wishes to pay the full loan amount before the loan expiry date. Many banks charge 1% of the loan amount. It is mentioned beforehand to check.
- Mortgage Charges
- If a borrower takes a loan against a property, a charge is levied so as to check the property and analyzing the market value, this is also an important check that the bank ensures before issuing the final loan agreement.
- Professional Charges
- To take action against the non-paid loans, banks hire a professional lawyer to handle the situation of non-payment and seize the property or asset by using the law, these professionals are paid and are usually charged by the borrower.
- Processing Charges
- When an applicant/borrower takes a loan, there is a processing charge over the loan amount to pay the loan officer for the task specified for the single loan borrower. The total maintenance of the loan amount and the recovery is looked over by the officer.
- Documentation Charges
- After the approval letter, the bank needs a legal paper to be signed for the loan amount so the recollecting of the loan amount is secured. These documents cost money, so they charge it.
- Commitment Charges
- These type of charges are usually charged for a high valued loan or in business loans, these type of loans are ensured by the bank to provide the full loan amount but if the borrower uses only less than what the loan amount is committed i.e 50% or less, the bank doesn’t get the interest on that amount so, a 1 to 2 % charge is levied on the loan amount.
- Insurance Charges
- This insurance charge is an optional charge and can be performed independently. And the bank makes sure whether the third party has mentioned the bank’s name so that if anything happens to the asset, the bank can claim that amount.
- CERSAI Charges
- CERSAI is a government website where the mortgaged land or property must be registered online so as to keep an record for the future as to prevent any fraudulent activity.
Before you sign the letter for the next step, please note this is not a legal version of the loan it is just a piece of letter to inform you about all the charges, instructions, and validities.
Banks always check the necessary documents thoroughly so it might take some time for the banks to issue you a sanction letter, so be patient. After you have received the sanction letter, make sure to check the amount, EMI, tenure, and many other aspects along with the specific fees mentioned there beforehand so you can’t complain that.
A pro tip could be, the letter can be xeroxed to keep a copy with the borrower so the bank cannot charge extra fees and this might break the rule in the eyes of law.