MCLR: The New Lender Guidelines and What It Means for You
Since 1st April 2016, banks and NBFCs have started following a new lending system – Marginal Cost of Funds-based Lending Rate or MCLR. The RBI announced this new guideline in order to ensure that borrowers avail a low rate of interest at any point of time during their loan tenure.
Also, you might have heard about repo rate cuts being announced by the RBI, but the same doesn’t get reflected in your loan’s rate of interest as soon as it should. However, with MCLR in place, banks and NBFCs have to reset the rate of interest periodically, which means you can expect a lower loan rate.
However, as of now, the MCLR lending system is restricted to a few loans. Let’s find out about the types of loan affected by new guideline.
Loans Affected by MCLR
The MCLR lending system has been adopted for floating loans only and not fixed ones. A floating loan sees its rate of interest fluctuating, depending on market conditions. On the other hand, in the case of a fixed loan, the rate of interest remains unchanged throughout the tenure.
Debts like Home Loans, Business Loans, and Loan Against Property come with a floating rate of interest. Whereas, debts like Personal Loans, Car Loans, Marriage Loans and Vacation Loans come with a fixed rate of interest.
Pros and Cons of MCLR
The Advantages of MCLR System are as Follows:
- Marginal fund costs like deposit rate (the rate at which financial institutions deposit cash with the RBI) and repo rate (lending rate of the RBI) will be considered while setting rate of interest
- Due to short-term MCLR rates, banks and NBFCs will have an edge over commercial paper market
- Companies can borrow at a low rate of interest
- A more dynamic and transparent banking and financial system
Now, Let’s Take a Look at the Disadvantages of MCLR:
- Banks and NBFCs can decide their reset dates and the rate of interest between two such dates will remain unchanged irrespective of any rate cuts
- Existing borrowers will not be affected as MCLR doesn’t change or uproot the base rate lending system
- At present, only Home Loans are linked with the MCLR system, which means other loan borrowers still have a long way to go
Why New Lenders Offer Better Rates?
If you consider transferring your Home Loan from your existing lender to a new one, you might be able to get a good deal. New lenders will factor in the latest repo and deposit rate cuts while setting your new floating rate of interest. Also, in order to stay ahead of the competition, they will offer you an attractive Home Loan rate.
How to Choose a New Lender?
Shop around for loans and find out if the guideline for new lendershas been implemented by a potential financial institution. Enquire about their new lending rate and, only when you’re satisfied that you can save a considerable amount of money, go with a Home Loan Balance Transfer.
MCLR has come as a relief to Home Loan borrowers but whether this lending system is linked to other loans or not is something we have to wait and watch.