Summary: The Reserve Bank of India has announced MCLR as the new benchmark for giving loans. Read on to know what it means for Personal or Marriage Loan holders.
Recently, the Reserve Bank of India announced a new benchmark for lending loans, Marginal Cost of Funds-based Lending Rate or MCLR. Previously, banks and NBFCs used the base rate system to set lending rates but from 1st April, 2016, all loans with floating rates have been linked with MCLR.
This reform was made in a bid to make loans cheaper for Indian citizens. Earlier, whenever the RBI announced a repo rate cut, banks and NBFCs took a lot of time to comply with the announcement and bring their lending rates down. But now, with the new lending system, financial institutions have to lower their rates as soon as the RBI cuts down repo and CRR rates.
Here are a few more things that you need to know about MCLR.
- Floating Rate Loans Linked to MCLR
When you apply for a loan, there are two kinds of interest rates that can be levied on it—fixed and floating. If you opt for a fixed rate of interest, then your interest charges will remain the same throughout the tenure of the loan. On the other hand, a floating rate of interest is influenced by market trends. Therefore, if you opt for a floating rate of interest, your interest charges could go up or come down many times during the loan tenure.
The MCLR benchmark is only applicable to loans that come with a floating rate of interest. The old base rate lending system will be used for loans that come with a fixed rate of interest. Usually, Home Loans, Loans Against Property, and Business Loans have a floating rate of interest, whereas Car and Personal Loans (Marriage Loans and ones for vacations) have a fixed rate of interest.
- Reset Clause Varies Across Financial Institutions
The RBI has asked banks and NBFCs to submit five MCLR rates—overnight, one-month, three-month, six-month, and one-year. Financial institutions can also set rates for longer periods, like two and three years. These rates are known as reset clauses and will vary depending on the tenure of your loan. So, for example, if your loan tenure is 10 years and your lending institution has a one-year reset clause, your floating rate of interest will be revised every year.
This system has both advantages and disadvantages because the new floating rate of interest will be based on deposit rates. If the deposit rate is higher, then your loan rate will go up and vice versa. Why? Because when the deposit rates go up, financial institutions have to pay higher interest amounts to Fixed Deposit holders. To balance this payout, they will levy a higher rate of interest on loanees.
- EMIs will Remain Unchanged
When the MCLR is reset, the tenure of your loan will change and not the EMIs. Your monthly instalments are most likely to remain the same. However, if the tenure exceeds 20 to 25 years, then your financial institution might change the EMI amounts. This is because banks and NBFCs usually don’t lend loans that stretch beyond 20 to 25 years.
Even though the EMI amount remains unchanged, you can always approach your lender and ask them to change it while keeping the tenure same. You can take this step if you want to clear your loan as soon as possible. But if you have adequate funds and will be able to afford high EMIs, there’s no point in stretching the loan tenure. You can also calculate monthly installment by using online personal loan EMI calculator it will provide you accurate output.
- Existing Borrowers Can Move to MCLR by Paying a Fee
The MCLR system will be used to lend loans to new borrowers, but if you already have a loan account and would like to move to MCLR, you can do so by paying a fee. The fee is charged in order to make up for the losses incurred by the bank or NBFC. However, even though you have to pay a fee, in the long run, you will still stand to benefit from the new lending system.
Calculate the interest charges you will be paying when you shift to MCLR in a year. This amount will generally be lower than the fees and the current interest charges you’re paying. So, in the long run, you will save money when you move to MCLR.
- Negotiate Charges
The difference between MCLR and base rates lies in the methodology used to calculate the rate of interest applicable to a loan. The MCLR-linked account comes with a spread, which means the bank or NBFC can decide the rate of interest depending on the risk factor of the borrower. So, if you have defaulted, you might have to pay high-interest charges.
Apart from this, your bank or NBFC might charge a lot when you shift to MCLR. However, if you have a good credit score, you can negotiate and bring down this fee.
The new MCLR system will definitely bring more transparency and efficiency to the banking sector. However, you should keep these 5 points in mind when you apply for Personal Loan online or approach a financial institution to change the lending system of your old loan.