7 Things Home and Auto Loan Borrowers Need to Know About MCLR
A rising inflation rate, the ongoing Covid-19 pandemic and the war in Ukraine have created uncertainties for the financial market across the world. The cost of fuels has already increased significantly, and now there are signs that loan rates will also become expensive.
Are you an existing borrower or a new customer considering buying a home or a new car? You can’t afford to ignore this news. Recently, some leading banks have increased the marginal cost of funds-based lending rate (MCLR), and now there are indications that floating rate lending will become expensive. What should an individual do in this situation?
Here are seven things borrowers should know about MCLR:
- If you have taken out a loan with variable interest rates, chances are that the loan is either linked to the MCLR or to the linked external reference system.
- The MCLR only applies to floating interest rates on loans.
- As of October 1, 2019, the RBI has made it mandatory to link an external benchmarking system for retail and MSME loans. However, it remains optional for business loans and other types of loans.
- MCLR only affects loans with variable interest rates. It does not apply to fixed interest rates.
- Customers can view the MCLR on the relevant bank’s website.
- Banks cannot lend below the MCLR without permission from the RBI.
- If the RBI raises the repo rate, it impacts the cost of funds for banks and hence interest rates rise for floating rate MCLR linked loans.
“The MCLR was first introduced on April 1, 2016 to resolve the complexities associated with the base rate regime. It was introduced with the aim of helping borrowers benefit from lower RBI rates. Therefore, the MCLR was introduced to bring more transparency and create a win-win situation for borrowers and banks,” says Adhil Shetty, CEO of Bankbazaar.com.
Recently, a few top lending institutions have increased their MCLR, which means home loans linked to floating rates as well as car loans are likely to become expensive. While the RBI repo rate remains unchanged, the rising cost of funding has led banks to make this move.