What is PLR in a home loan

When applying for a home loan, you might hear the term PLR, which stands for Prime Lending Rate. It’s important to understand PLR because it affects the interest rate you’ll pay on your loan. Many people focus only on the interest rate offered by the bank but don’t consider how that rate is determined.

What is PLR?

PLR is the basic interest rate set by banks and Non-Banking Financial Companies (NBFCs) for lending to customers. Banks use the PLR as a starting point and then add or subtract a percentage to decide the final interest rate on a home loan. The Reserve Bank of India (RBI) doesn’t control each bank's PLR, so every bank or NBFC can set its own PLR based on their rules.

How is PLR Used in Home Loans?

Many banks and NBFCs offer home loans at an interest rate that is linked to the PLR. Borrowers may receive a loan at a rate that is either equal to, above, or below the PLR. If the PLR of a bank is 12% and they offer a home loan at "PLR minus 3%," the actual interest rate charged to the borrower will be 9%.

Factors Affecting PLR in Home Loans

1. Bank’s Cost of Funds - If the bank’s cost of borrowing increases, it may increase its PLR, leading to higher interest rates for borrowers.

2. Market Conditions - Inflation, economic growth, and RBI policies play a key role in determining PLR. When RBI raises repo rates, banks often raise PLR.

3. Creditworthiness of the Borrower - While PLR is a benchmark, a borrower with a strong credit history can negotiate better loan terms.

4. Type of Lender - NBFCs usually have higher PLR compared to public sector banks due to higher operational costs.

5. Loan Tenure - Some banks charge different PLR for different loan tenures. Short-term loans may have a different PLR than long-term home loans.

Difference Between PLR and MCLR

MCLR (Marginal Cost of Funds-Based Lending Rate) is another way of setting interest rates introduced by the RBI to make lending clearer. While many NBFCs still use PLR, banks follow MCLR. The main difference is that MCLR is more closely connected to the RBI's repo rate, while PLR is decided by each bank.

Benefits of Understanding PLR Before Taking a Home Loan

• Negotiation Power - Borrowers who understand how PLR works can negotiate better interest rates with lenders.

• Better Loan Planning - Awareness of PLR trends helps in choosing the right time to take a loan.

• Avoid Overpaying - Some banks keep PLR high to charge more interest, so comparing different lenders can save money.

Conclusion

PLR is an important factor that affects the interest rates on home loans. Since each bank and NBFC sets its own PLR, it’s important to compare different lenders before getting a home loan. Borrowers should also check whether their loan is based on PLR or MCLR to understand how their interest rate might change later. By understanding these terms, you can make a smarter choice and save money in the future.

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Frequently Asked Questions (FAQs)

1. Is PLR the same for all banks?

   • No, each bank and NBFC has its own PLR based on its internal policies and financial conditions.

2. Can PLR change after taking a home loan?

   • Yes, PLR is subject to market conditions and may change over time, affecting your loan interest rate.

3. How is PLR different from MCLR?

   • MCLR is regulated by the RBI and is more transparent, while PLR is set by individual banks and NBFCs.

4. Does a lower PLR mean a cheaper home loan?

   • Not necessarily. The final interest rate depends on the discount or premium applied to the PLR.