What is the Difference Between MCLR and Base Rate
24 December, 2024
Synopsis
- MCLR is the minimum interest rate a bank can charge for a loan.
- Base rate was the lowest rate RBI would impose on loans.
- RBI’s repo rates can impact MCLR rates.
When it comes to banking and finance, interest rates are important especially in relation to Home Loans. Base Rate and MCLR (Marginal Cost of Funds based Lending Rate) are two important key components to look at. Let us read what these terms mean, how they affect the borrowers and whether switching from Base Rate to MCLR would be a clever idea.
Understanding the Difference Between MCLR and Base Rate
Here’s what you need to know about MCLR and base rates:
MCLR
MCLR is the minimum interest rate a financial institution charges for a specific loan. It dictates the lower limit of the interest rate for a loan. Until the Reserve Bank of India indicates otherwise, this rate cap is fixed for borrowers.
Base Rate
Prior to the establishment of the MCLR, the base rate was the lowest interest rate that the Reserve Bank of India would impose on loans. Both serve as the lowest interest rate that a financial institution can charge a borrower, hence they operate similarly to the MCLR rate.
Know the difference between Base Rate vs. MCLR
When it comes to understanding the difference between the Base Rate and MCLR, there are four critical points to consider:
Cost Basis: The Base Rate is primarily determined based on the average cost of funds. In contrast, the MCLR (Marginal Cost of Funds based Lending Rate) depends on the marginal cost of funds.
Calculation: For the Base Rate, operating expenses and the costs associated with maintaining the cash reserve ratio are crucial factors in its calculation. On the other hand, the MCLR considers deposit rates, repo rates, operating costs, and the cost of maintaining the cash reserve ratio.
Repo Rate Influence: The Base Rate does not depend on changes made to the Repo Rate, whereas MCLR is directly influenced by these changes.
Rate Variation: The MCLR varies according to the tenure of the loan, while lenders have the flexibility to change the Base Rate every quarter.
What is Repo Rate?
This is the rate at which RBI gives commercial banks money. When the RBI changes Repo Rate, it influences the cost of funds for banks.
Repo Rate vs. MCLR
Whenever the RBI reduces its Repo rates, this enables the borrowing of cheap money by banks leading to lower MCLR rates. Conversely, an increase in the Repo Rate can result in higher borrowing costs for banks and higher MCLR rates.
Should You Switch from MCLR to Base Rate?
To change from Base Rate to MCLR depends on various factors namely, current interest rate, spread given by your bank and the rate revisions frequency. Before making any decision, consider other costs associated with switching like administrative fees or penalty charges levied by banks. Nonetheless, you want to consult an expert before making a choice. Financial advisors can help you with the transfer process and give you the most recent information.
Apply for Home Loans with HDFC Bank
By choosing the right interest rate basis, you can better manage your Home Loan costs and make informed financial decisions. Apply for an HDFC Bank Home Loan today and get access to a wide range of features, including competitive interest rates, quick and transparent processing, minimal documentation and dedicated loan management platform. Apply now.
*Disclaimer: Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Loan at the sole discretion of HDFC Bank Limited. Loan disbursal is subject to documentation and verification as per Bank's requirement. Interest rates are subject to change. Please check with your RM or closest bank branch for current interest rates.
