What is MCLR Rate ?

MCLR (Marginal Cost of Funds Based Lending Rate) was introduced by the Reserve Bank of India (RBI) on Apr 1, 2016, to help tackle problems that are related to the base rate regime. The main aim of MCLR is to help you (borrower) avail of various loans such as home loans, etc., at the RBI’s interest rate cut.

If you have borrowed a loan before Apr 1, 2016, then you have an option to shift loans and avail of the benefits of the apex bank’s rate cuts. So, loans taken on or after this date are linked to MCLR. To know exactly what the MCLR rate is and how it affects the loans, let us dive into the blog.

What is MCLR Rate?

MCLR refers to the minimal interest rate below which any financial institution cannot lend, except under certain parameters. Earlier, financial institutions did lend on base rates, and only the prime customers were qualified to get undue advantages. 

For example – If the base rate of lending was 8%, certain financial institutions made sure to lend loans to their prime customers at 8% or even below. On the contrary, the rate of interest for ordinary customers would be around 10-12%.

Since the base rate is an internal policy of any financial institution, changing the base rate for certain prime customers resulted in huge monetary loss. And, even after the rate cuts, financial institutions would rather delay in lowering their lending rates and pass the benefits to their customers.

Considering all these points, the present MCLR aims to:

  • Maintain the level of transparency between financial institutions and their customers while determining their interest rates.
  • Ensure to pass on the timely benefits of reduced interest rates to their customers.
  • Maintain a win-win situation by ensuring the availability of loans to both the customers and lenders.

Also, under MCLR, the financial institutions must provide details about 1-month, 3-month, 6-month, 1-year, and 2-year interest rates every month. So, as a borrower, you can know the MCLR rates from your lender’s websites.

How Will a Hike in Repo Rate Affect MCLR Rate?

A rise in repo rate will impact the lender’s MCLR rate. Lenders also push up their MCLR rate which will in turn hike the interest rates and EMIs. However, remember that the hike will be applicable only on floating interest rates and not on fixed interest rates.

How to Reduce the Impact Caused Due to Hike in MCLR Rate?

With the hike in MCLR rates that pushes up your EMIs, you can ensure to take certain steps to reduce the impact caused. Two effective strategies include:

  • You can increase the loan tenure to reduce your EMIs.
  • You can make part-prepayments to reduce your EMIs.

Conclusion

If you have availed of a loan post April 1, 2016, then you are automatically linked with the MCLR mode. But, if you have availed of a loan before this date and linked to the base rate regime, then don’t worry, you can still switch on to the MCLR mode. If your loan is nearing the completion of its tenure, then it is better to stick with the base rate.

In case you don’t need a higher loan amount and just need funds to meet your basic or urgent necessities, then you can avail a loan of up to 2,00,000 from FlexSalary. You can apply today and get cash on the same day.

FAQs

1. Which loans are linked to the MCLR rate?

If you have taken any loan before Apr 1, 2016, then as a borrower, you still have an option to shift your loan loans under MCLR mode and avail the benefits of the apex bank’s rate cuts.

2. What happens if MCLR increases?

Remember that, MCLR is subjected to revisions. An increase in MCLR will increase the loan rates and thereby make them costlier.

3. Are home loans linked to MCLR?

An increase in the MCLR rate will proportionally increase the floating rate of interest on long-term loans such as home loans, corporate term loans, loans against property, etc.

4. What is the aim of introducing the MCLR rate by the RBI?

To help improve the transparency between the lenders and their borrowers on the interest rates on advances.

5. What are the components of MCLR?

MCLR is internally calculated by the bank based on four components:

  1. Marginal Cost of Funds
  2. Cash Reserve Ratio (CRR)
  3. Tenure Premium and
  4. Operating Costs