PLR, Base Rate, MCLR And RLLR Linked Home Loan: Which Shall Lower Your EMI?

Interest rate on borrowings is pegged to internal benchmarks or external benchmarks. And in the recent time, viewing the process adopted by banks where they had been reluctant to transfer any rate cut move by the RBI to the end consumer. So, other than the internal benchmark i.e. the rate based on the cost of funds for the bank, external benchmarking is thought as a fair way to decide on interest rates for lending money.

PLR, Base Rate, MCLR And RLLR Linked Home Loan: Which Shall Lower Your EMI?

And over the period of 10 years, the benchmarking has been a vast change from PLR or prime lending rate to the latest Repo-rate linked lending rate.

Before it and still many of the banks are going by the MCLR regime where a spread is charged over and above the MCLR or marginal cost of funds based lending rate. The spread is decided basis a number of factors including credit worthiness of the borrower, your employment status or profession and other factors including your repayment ability.

The benefit with the external benchmarking is that the transmission of rates has to be in line with the ongoing external benchmark rate and banks cannot give an excuse on it.

From April 1, while the RBI has asked to link all the floating loans with the external benchmark, the decision to this effect was put on hold. For the external benchmark, the various rates suggested include:

1. Reserve Bank of India policy repo rate, or

2. Government of India 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL), or

3. Government of India 182 days Treasury Bill yield produced by the FBIL, or

4. Any other benchmark market interest rate produced by the FBIL.

And while the loan pegged to the external benchmark has been launched by Citibank, the launch now becomes noticeable, because the launch being from the leading bank of the country.

MCLR vs RLLR: Which is better?

Though RLLR seems to be lower, experts in the domain do not see any major change in loan interest rate for new borrowers if they go by the new schema of things i.e. take to RLLR.

But what comes with RLLR is the transparency, you know the repo rate and the spread, so the interest rate charged over this amount will become more transparent for you. And you will no longer have any grudge that banks do not transmit repo rate cuts on a prompt basis as is the case in MCLR linked home loans. In case of MCLR, you have no idea about the underlying calculation.

And the drawback here will be interest rates can change frequently with a lower reset period that could be discomforting for the borrower . In case of floating loans, there is a reset period after which the interest rates are changed for your borrowings.

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