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Everything you Need to Know about the New Lending Rate—MCLR
Do you know what the new Home Loan interest rates are all about? No? Well, this article will tell you all you need to know.
Recently, the RBI governor Raghuram Rajan introduced a new lending rate regime called the Marginal Cost of Funds (MCLR), in a bid to improve the way consumers get their loans. Earlier floating loan interest rates were tied closely to the base rate. But now, this new move set better guidelines to ensure that end users don’t get tricked by the bankers’ jargon and business practices.
Under the MCLR, the current home loan rates are 10 bps less than that of a base rate loan. BPS or basis points are one-hundredth of a percentage.
Let’s try to understand the key aspects of this new loan rate better.
What is an MCLR?
MCLR is a new benchmark lending rate that financial institutions need to follow before offering a loan to their new customers. Banks and NBFCs used the base rate formula for lending loans until March 31st, 2016, but after that, the MCLR system has been put in place. While new loanees will get MCLR-linked loans, existing customers have to request for a change from base-rate lending system to MCLR.
What loans are linked to MCLR?
All floating interest rate loans like home loan against property, and other corporate loans are linked to MCLR. However, fixed rate loans like Personal Loans, Car Loans, and Educational Loans are not linked with MCLR.
How does this loan work for the borrower?
If you’ve opted for a floating Home Loan, it’ll be linked with MCLR. Under this lending system, there are two important factors—there will be a reset clause in your loan document and you will have a spread.
The reset period will vary from one financial institution to another and after every reset, your rate of interest will be reviewed. The new rate of interest will be in line with the CRR deposit rate at the time of resetting. If the deposit rates are higher, your Home Loan interest rate will rise and vice versa.
This kind of loan comes with a spread, which is usually the margin you have to pay on the MCLR. Say, for instance, you are getting a Home Loan at 9.5%; this interest rate is added to the spread rate (25 bps for Home Loans), thereby increasing the rate of interest to 9.75%.
Will this affect the EMI?
Under the new guideline, only the tenure of the loan changes and not the EMI. This means that the repayment period will change while the EMIs stay the same. However, if you’re looking to get a reduced tenure, you will need to inform your lender about it.
Can you switch to MCLR loans?
There is a provision for you to switch from base-rate to MCLR. To do this, you’ll need to pay a processing fee of 0.50% of the Home Loan amount, along with other administrative charges levied by the lender. These charges can be negotiated depending on your credit score.
The above pointers are some of the most important things you will need to know about the MCLR lending system. With this system coming to effect, prospective loan buyers, like you, will have a more transparent system to deal with, as opposed to the old, closed-door system.
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