2 min read
25 May 2021

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 is and how it affects the borrowing exercise.

What is the 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 advantages.

For example, if the base rate of lending was 7%, certain financial institutions would lend to their prime customers at 7% or below. On the other hand, for ordinary customers, 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, the current Marginal Cost of Funds based 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
  • 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?

In the advent of a hike in the repo rate, it will also impact lenders’ MCLR rate. Lenders will push up their MCLR rate that will translate to a spike in interest rates and EMIs. However, do note that this hike will be applicable only to floating interest rates and not fixed interest rates.

Additional Read: Planning for home loan balance transfer? Know the MCLR rate

How to combat effects of a rise in MCLR rate?

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

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