MCLR Vs RLLR: Know Your Home Loan Better

Looking to borrow funds? Wondering which home loan to choose? When planning finances to buy a house, keep an eye on loan interest rates.  If you have an estimate of the interest rates, you can accordingly evaluate if you will have enough spare funds at the end of the month to pay off the EMIs. With the most recent RBI repo hike on February 8, 2023, the current repo rate stands at 6.50%. When the banks charge higher interest, the loan amount increases, thereby also increasing the monthly EMI amount. Read on to know more about MCLR lending rates, RLLR lending rates, and how to avail of the lowest interest rates when borrowing home loans.

MCLR means in banking

The Marginal Cost of Funds based Lending Rate (MCLR) is the minimum interest rate that a bank can charge their customers for taking loans. In other words, MCLR is an internal benchmark used by lending firms to determine the interest rates that they can offer to their clients. Before April 2016, banks offered interest rates according to their base rate. The base rate system was absolved because banks often delayed in transferring rate-cut benefits to their customers.

The MCLR is based on a bank’s marginal costs like the cost of borrowing loans, interest given on deposits, tenure of the loan, legal charges, and other expenses. This system helps to ensure that bank interest rates align with market rate fluctuations and there is greater transparency in the banking system.  The MCLR does not just benefit the public but also allows lenders to price their loans independently as per the RBI’s monetary policy.

What are the RBI guidelines on the MCLR?

  • Lenders may review their MCLR rates once a month.
  • Banks must review their MCLR rates at least once every year, even if they do not plan to make any changes in their MCLR rates.
  • Any new MCLR rate changes would be effective from the 1st of the following month.
  • Lenders must always be transparent about their MCLR rates and display their MCLR rates on every one of their branches and their official websites.
  • MCLR rates do not affect home loans taken on fixed interest rates.
    For floating rates, the MCLR on the day the loan was sanctioned is taken to be the lending rate.

How will a hike in repo rate affect MCLR?

The RBI’s repo rate increases lead to a rise in MCLR rates. Since MCLR includes marginal costs, it also includes the bank’s cost of borrowing from the RBI. For example, if the RBI raises its interest rates, banks will also have to increase their rates. MCLR rates do not immediately reflect repo rate changes, as banks review their rates every quarter. Please note that the relationship between MCLR rates and RBI rates is not linear. Other factors like the competition between banks, an individual’s creditworthiness, and demand for credit also directly impact MCLR rates.

RLLR meaning in banking

Repo Linked Lending Rate (RLLR) is a new system introduced by the RBI in 2019. Under the RLLR scheme, banks have to link their interest rates to repo rates. Repo rate is the interest on which the RBI loans funds to commercial banks. Under the RLLR system, banks must review their interest rates at least once in three months to make sure that they are aligned with the repo rate changes. This system is expected to make the lending process more transparent and efficient. Lenders are allowed to spread the margin of RLLR rates and decide their interest rates to cover expenses and borrowing costs.

How will a hike in repo rate affect RLLR?

Since RLLR is directly linked to RBI’s repo rates, they have a direct impact on the RLLR. Under the RLLR system, lending rates are calculated as a sum of the RBI’s repo rate plus a margin that is set by the bank. For example, if the RBI increases its repo rates by 0.25%, banks that have set their interest rates as 3% would increase to 3.25%. Any change in RBI’s repo rates would reflect on a bank’s RLLR from the next review date. Depending on the down payment an individual makes and their creditworthiness, one may also avail of slightly higher or lower interest rates.

MCLR Vs RLLR: What to choose as a borrower?

As a home loan borrower, it may be difficult to choose between MCLR and RLLR. Here are a few factors that you may consider before choosing home loan interest rates.

  • Transparency: The RLLR is considered to be more transparent than the MCLR since any repo rate changes immediately reflect on the RLLR lending rate. Banks add their internal expenses to the MCLR rates, thus it may not be as transparent as the RLLR.
  • Responsiveness: The RLLR is more responsive to changes in the repo rate. It is beneficial if the market rate drops, but you may end up paying higher EMIs if the repo rate increases. Since the MCLR system delays in reflecting repo rate changes, it may be a more stable option for loans with a longer tenure.
  • Interest margin: Banks are allowed to stretch the margins of their interest rates and offer slightly higher or lower rates than the benchmark to individuals, depending on their credit score and income streams. The bank’s internal costing also plays a role in altering interest rates. The interest burden is also comparatively lower in MCLR until the RBI extensively increases its repo rates. When planning to take a home loan, compare different lenders and then choose between MCLR or RLLR, depending on what fits your needs.
  • Loan tenure: If your loan tenure is longer, say 15 to 20 years, you may not want your interest rates to reflect repo rate changes as soon as they are implemented. While RLLR loans are more transparent and super responsive to repo rate changes, they may not be ideal to choose when the RBI hikes their repo rates. MCLR factors in the lender’s expenses, however, they delay in reflecting repo rate changes, making them a better option for loans with longer tenure.

Each option has its benefits as well as drawbacks. What matters is your needs and preferences. Make sure to take note of the above factors like interest rate volatility, loan tenure, and the lender’s internal expenses before choosing between MCLR and RLLR.

Interest rates are an important tool for borrowers to compare lenders and understand what they are likely to be charged on loans. The best way to ensure that you can avail of the lowest interest rates is to have a steady income and an excellent CIBIL score. Fixed interest rates are typically higher than floating interest rates, however, with floating lending rates, you can take advantage of the market rate cuts. Whether you should choose MCLR rates or RLLR rates depends on your financial situation and your loan tenure.

If your loan repayment tenure is over 15 to 20 years, you may benefit more from MCLR lending rates as the impact of repo rate changes takes time to reflect on MCLR rates. If you plan to take a short-term loan and would require more transparency, choose RLLR lending rates. If the market rate decreases, it is a win-win, but you must be prepared to pay off a slightly higher EMI if the repo rate does increase.

If you are feeling dubious and would like a professional opinion, consult ApnaPaisa. They are one of the leading loan agencies in India, offering quick loan disbursals with minimal paperwork. You can also talk to their experienced financial planners to help you choose the right loans suited to your needs.


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