Marginal Cost of Lending Rate or MCLR is a benchmark set by Reserve Bank of India that financial institutions need to follow to determine their lending rates for various advances.
This rate has replaced the old base rate of lending from April 2016. To a great extent, it has benefitted the borrowers as lenders now cannot fix the interest rates on different loans, including home loans higher than the limit prescribed by the RBI.
Moreover, since MCLR is directly linked to the cost of funds which further depends on repo rate, borrowers can enjoy the benefits of recent RBI repo cuts immediately. Nevertheless, before opting for a loan, it is advised that individuals should know about what is MCLR rate and how it works at large.
How does MCLR work?
MCLR is a tenure-linked internal benchmark of financial institutions. It also means that lenders will set the lending rate of various loan products by adding their “spread” to the MCLR. Moreover, this financial metric is available both on fixed and floating interest rates.
This MCRL depends on four major components that include -
- Marginal cost of funds
- Tenure premium
- Operating cost
- Negative carry on CRR
Only after taking all these factors into consideration, lending institutions offer funds to its borrowers. It is, thus, imperative to know about this rate and how it affects borrowers before making an informed decision.
How MCLR affects borrowers?
This MCLR rate affects the interest rates of any loan, including a home loan. For instance, any hike in this rate hardens EMI components and vice versa.
Read Also: MCLR Rate: What it is and how to Calculate?
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