Difference between MCLR and PLR

Difference Between MCLR and PLR in Home Loans 

Securing a home loan is a significant financial decision, and navigating the intricacies of interest rates can be overwhelming. Two crucial benchmarks that influence your home loan interest rate are MCLR (Marginal Cost of Lending Rate) and PLR (Prime Lending Rate). Choosing the right benchmark can significantly impact your monthly payments and overall loan burden. 

This blog post delves into the key distinctions between MCLR and PLR, empowering you to make an informed decision when selecting the most suitable benchmark for your home loan. Stay tuned as we explore the intricacies of these benchmarks and guide you towards a financially advantageous home loan option.

What is MCLR?  

The Marginal Cost of Funds-Based Lending Rate (MCLR) is the lowest interest rate at which a bank is allowed to lend. MCLR has replaced the previous base rate system in determining lending rates for commercial banks. 

The bank changes its MCLR every month, and it depends on things like how much it costs the bank to get money, its day-to-day costs, the money it keeps in reserve, and the duration of loans. This rate is connected to the repo rate determined by the RBI (Reserve Bank of India).

The RBI introduced MCLR on April 1, 2016, as a method to establish interest rates for loans. It serves as an internal benchmark for banks to set the interest they charge on loans. 

What is PLR?

PLR, or the Prime Lending Rate, represents the interest rate at which financial institutions, such as Truhome Finance, lend money to their most creditworthy customers. This rate acts as the baseline for various loans provided by these institutions, such as home loans, personal loans, and business loans. Essentially, it serves as a reference interest rate Non-Banking Financial Corporations (NBFCs) and Housing Finance Corporations (HFCs) offer home loans. 

The PLR rate 

The PLR rate is fixed and the spread varies from customer to customer. It is an average interest rate at which the lender has borrowed the money. When you apply for a home loan, the lender will impose an interest rate calculated using the PLR rate plus a specific percentage, referred to as the "spread."

Understanding that the PLR rate and spread can significantly influence your overall loan cost is crucial. Even a slight increase in the PLR rate can lead to a substantial rise in your overall interest outflow. It's noteworthy that the final interest rate for a home loan is typically higher than the prime lending rate, especially for borrowers with a low credit score or less credibility.

Difference Between PLR and MCLR

Here are some of the differences between MCLR and PLR home loan:

How Does the MCLR Impact Your Home Loan?

If there is a change in the MCLR rate, your monthly payment and the duration of your loan will be adjusted accordingly. When the MCLR goes up or down, the interest rate on loans connected to it changes accordingly. 

So, if the MCLR goes up, the tenure increases and vice versa, while the EMI remains constant. Switching to these loans may not immediately benefit you if the reset period is imminent. Home loans determined by the MCLR can simplify the process of determining interest rates and make it easier to pass on the advantages of reduced interest rates to borrowers.

The PLR directly impacts how much interest you'll pay on your home loan. It is a key factor in determining the interest rate on all types of loans, including home loans. If the prime lending rate increases, you will end up paying more interest. Contrarily, if the prime lending rate decreases, you'll save money on the total interest you must pay.

Factors Influencing the PLR

When determining their prime lending rate, lenders factor in various elements that play a pivotal role in setting the interest rate for borrowers. The primary considerations include:

• Internal considerations: Lenders weigh several internal factors before establishing the Prime Lending Rate. These factors comprise the lender's cost of funds, administrative expenses, risk premium, and desired profit margin. Any alteration in these elements can lead to a corresponding change in the Prime Lending Rate.

• External considerations: Lenders also take external factors into consideration when deciding on the Prime Lending Rate. These external factors encompass prevailing market conditions, inflation rate, economic growth, and the monetary policy established by the Reserve Bank of India (RBI). Adjustments in any of these external factors can have an impact on the Prime Lending Rate.

• Base rate: This represents the minimum interest rate at which a lender can extend a loan. While lenders have the flexibility to determine their base rate, it cannot fall below the rate prescribed by the RBI. Modifications in the base rate directly influence the Prime Lending Rate.

• Borrower's credit profile: Lenders assess the creditworthiness of a borrower before providing a home loan. A borrower's credit score, credit history, income, and employment status all contribute to the Prime Lending Rate offered to them. Individuals with a strong credit profile may receive a lower PLR compared to those with a less favourable credit history.

Conclusion

In conclusion, understanding the difference between MCLR and PLR in home loans is crucial for making informed decisions. MCLR, revised monthly by the bank and linked to the RBI's repo rate, offers transparency and reflects current market conditions. On the other hand, PLR, used by HFCs like SFHL, sets interest rates based on the company's internal factors. 

Borrowers need to evaluate loan structures and choose what aligns with their financial goals, rather than objectively comparing the pros and cons of MCLR and PLR.

FAQs

Here are some frequently asked questions about MCLR:

1. What does MCLR stand for in the context of home loans? 

MCLR stands for Marginal Cost of Funds-Based Lending Rate. It is the benchmark interest rate used by banks to determine the lending rates for various loan products, including home loans.

2. Do MCLR loans provide clearer information compared to base rate loans? 

MCLR loans determine interest rates by looking at the current additional cost of obtaining funds. In contrast, base-rate loans consider the overall average cost of funds. This is why a lot of borrowers favour MCLR. However, it is up to the borrowers to gauge their financial goals and choose the appropriate financial institution for home loans.

3. What factors influence the MCLR for home loans? 

The MCLR for home loans is influenced by factors such as the repo rate, cost of funds, operating expenses, and the tenure premium. It is calculated based on the bank's marginal cost of borrowing and return on net worth.

4. How does the MCLR affect the interest rate on a home loan? 

The interest rate on a home loan is typically linked to the MCLR. Any changes in the MCLR will result in a corresponding change in the home loan interest rate. This ensures that the loan interest rates are more reflective of current market conditions.

5. What is the current interest rate set by the RBI using the MCLR?

The Reserve Bank of India has established the present MCLR for overnight loans, ranging from as low as 6.70% to as high as 9.35%. This rate acts as a reference point for lending, indicating the lowest interest rate at which banks can provide overnight loans. It's determined by considering the banks' costs and other important factors. It is also crucial to understand that the MCLR rates differ with the tenure of the loan.