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MCLR Rate and its effects on Loans: Demystified

  • Highlights

  • MCLR aims to pass the benefits of rate cuts to customers

  • All loans on or after 1st April 2016 are linked to MCLR

  • You can switch to the MCLR mode from base rate mode

  • A hike in repo rate will push up MCLR rates

Introduced on 1st April 2016 to tackle problems related to the base rate regime, the Marginal Cost of Funds Based Lending Rate (MCLR) was aimed to help borrowers, availing various loans including home loans, benefit from the Reserve Bank of India’s (RBI) rate cut.

Today, as a borrower, you have the option to shift loans taken prior to 1st April 2016, to the MCLR mode and avail the benefits of the apex bank’s rate cuts. Loans taken on or after this date, are linked to the MCLR. Read on to know what exactly is MCLR and how it affects the borrowing exercise.

What is MCLR Rate?

MCLR (Marginal Cost of Funds Based Landing Rate) refers to the minimum interest rate below which financial institutions can’t lend, except in certain cases. Earlier, when banks and financial institutions did lend on base rates, its prime customers used to get undue advantage(s).

For example, if the base rate of lending was 7%, certain financial institutions used to lend their prime customers at 7% or below. On the other hand, for ordinary customers (borrowers), this rate of interest could have been 10-12%.

Since base rate was a financial institution’s internal policy, this caused a huge monetary loss. Also, even after rate cuts, a lot of time was taken by financial institutions to lower their lending rates and pass the benefits to customers.

Additional Read: All you need to know about MCLR based Home Loans

However, current Marginal Cost of Lending Rate (MCLR) aims to:

  • Bring the much-needed transparency in financial institutions while determining their interest rates
  • Pass the benefits of reduced interest rates to customers ASAP
  • Ensure availability of loans to customers that is fair to both customers as well as the lender
 

Also, under MCLR, it’s mandatory for banks to declare their overnight, 1-month, 3-month, 6-month, 1-year and 2-year interest rates every month. Now you as a borrower, can know the MCLR rates of banks from their websites.

With pre-approved offers from Bajaj Finserv on home loan, business loan and personal loan among others, availing finance is an easy and hassle-free affair. Know about your pre-approved offer within seconds by providing a few basic details

How a Hike in REPO Rate will affect MCLR Rate?

Note that RBI has hiked the REPO rate, for the first time in 4 years. The hike will definitely harden interest rates and have an impact on the MCLR rate as well. Banks and other financial institutions will push up their MCLR rates and the same will spike up the interest rate and increase the EMI. At the same time, it’s important to note that MCLR is linked only with floating interest rates and not fixed rates.

Additional Read: Planning for Home Loan Balance Transfer? Know the MCLR Rate

How to Combat effects of a Rise in MCLR Rates?

With MCLR rates pushing up EMIs, you can take certain steps to reduce its impact. Two effective strategies are:

  • To increase the loan tenor to reduce the EMIs
  • Make part pre-payment to bring down the EMIs
 

The final word

If you’ve availed a loan after 1st April 2016, then it’s automatically linked with the MCLR mode. However, if your loan is taken prior to this date and linked to the base rate regime, you can always switch to the MCLR mode. However, if you loan is nearing completion of its tenor, it’s better to stick with the base rate.

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