MCLR is known as Marginal Cost of Funds-Based Lending rate. It was replaced by an older rate system called BPLR (Benchmark Prime Lending Rate). It was introduced by the RBI (Reserve Bank of India) on April 1, 2016. MCLR is the minimum interest rate that banks need to charge on various types of loans, including home loans. If someone took a home loan before April 1, 2016 then the loan will be connected with “Base Rate” this rate is again similar to MCLR and RBI uses this base rate system to lower the interest rate before introducing MCLR.
You must have questions like what is the difference? What are the pros and cons? Let’s understand!
MCLR stands for Marginal Cost of Funds-Based Lending Rate. It is the minimum interest rate that banks can offer on loans, based on the cost of borrowing funds. MCLR takes into account factors like the bank's marginal cost of funds, operating costs, and profit margin, RBI decision on repo rates. Unlike the Base Rate, MCLR can change more frequently, usually every month, making it more responsive to market conditions. This helps borrowers get more competitive interest rates on loans.
| Pros | Cons |
|---|---|
| Faster Rate Transmission: MCLR allows changes in the RBI’s policy rates to reach borrowers faster, so interest rates are adjusted more quickly. | Frequent Changes: The regular updates of MCLR rates can cause frequent changes in interest rates, which can make it hard for borrowers to manage their finances. |
| Lower Interest Rates: When interest rates are falling, borrowers can get lower MCLR rates than base rates. | Complexity: Calculating MCLR is more complicated than the base rate, which makes it harder for borrowers to understand how their interest rates are set. |
| Dynamic Pricing: MCLR is reviewed and updated regularly, either every month or every three months, making sure loan prices match current market conditions better. | Increased Costs: When interest rates go up, MCLR rates can increase faster, which means higher EMIs for borrowers. |
| Transparency: Calculating MCLR is clearer, so borrowers can easily understand how their interest rates are set. | Higher Initial Rates: Sometimes, the initial MCLR rates can be higher than the base rates, especially for longer loans. |
| Flexibility: Banks can set different MCLR rates for various loan durations, giving borrowers more options to choose from. |
The Base Rate is the minimum interest rate set by the Reserve Bank of India (RBI) that banks can charge their customers for loans. It ensures that banks don't lend money below this rate, helping maintain transparency and stability in lending practices. The Base Rate is influenced by factors like the banks’ cost of funds, deposits, their operational costs, CRR maintenance cost.
| Pros | Cons |
|---|---|
| Stability: The base rate doesn’t change often, so it gives borrowers a steady interest rate for a long time. | Slow Adjustment: Changes in the RBI’s policy rates don’t immediately affect the base rate, so interest rates for borrowers adjust more slowly. |
| Uniformity: Since all banks follow the base rate system, it creates a consistent way of setting interest rates across the banking industry. | Higher Rates: The base rate system usually leads to higher interest rates than MCLR, especially when interest rates are going down. |
| Regulation: Because the RBI regulates it, the base rate system makes sure that interest rates are set fairly and in an organized way. | Lack of Flexibility: The base rate system doesn’t give banks much flexibility to change interest rates based on market conditions or their own funding costs. |
| Limited Benefit: Borrowers may not see immediate benefits from lower policy rates because banks take time to adjust their base rates. |
The Base Rate system often results in a lag in the transmission of RBI’s policy rate changes to borrowers, as banks take time to adjust their base rates. On the other hand, the MCLR system allows for faster rate transmission, ensuring that borrowers benefit more quickly from changes in the RBI’s policy rates.
During periods of declining interest rates, MCLR rates tend to be lower than Base Rate rates, providing borrowers with the benefit of lower EMIs. However, during periods of rising interest rates, MCLR rates can increase more quickly, leading to higher EMIs for borrowers.
The Base Rate system is simpler and easier to understand, providing borrowers with a clear understanding of how their interest rates are determined. In contrast, the MCLR system is more complex but offers greater transparency in the calculation of interest rates, ensuring that borrowers are aware of how their rates are determined based on the marginal cost of funds and other factors.
The MCLR system provides banks with greater flexibility to set different rates for different loan tenures, allowing borrowers to choose the loan tenure that best suits their financial needs. The Base Rate system, on the other hand, offers less flexibility in terms of interest rate adjustments.
The Base Rate system offers more stability in terms of interest rates, as changes are less frequent. The MCLR system, however, involves periodic revisions, leading to more frequent changes in interest rates.
Both the Base Rate and MCLR systems have their own set of advantages and disadvantages. The Base Rate system offers more stability and simplicity, making it easier for borrowers to understand and plan their finances. However, it lacks the flexibility and responsiveness to market conditions that the MCLR system provides.
On the other hand, the MCLR system ensures faster transmission of policy rate changes, providing borrowers with the benefit of lower interest rates during declining interest rate periods. However, it involves more frequent changes and a more complex calculation process, which can make it harder for borrowers to understand and plan their finances.
Ultimately, the choice between a home loan on the Base Rate versus MCLR depends on your financial situation, risk tolerance, and preference for stability or flexibility. It is essential to carefully consider the pros and cons of each system and choose the one that best suits your needs and long-term financial goals.
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Yes, you can switch from a Base Rate home loan to an MCLR home loan. You will need to approach your bank and request the switch. Some banks may charge a conversion fee for this process.
2. How often is the MCLR rate revised?
The MCLR rate is typically revised on a monthly or quarterly basis, depending on the bank’s policy.
Yes, your EMIs may change if you switch from a Base Rate home loan to an MCLR home loan. The change in EMIs will depend on the difference between the Base Rate and the MCLR at the time of the switch.
For long-term home loans, the MCLR system may be more beneficial during periods of declining interest rates, as it ensures faster rate transmission. However, during periods of rising interest rates, the Base Rate system may offer more stability.
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