While availing credit in the Indian market, it is common to come across terms that may seem difficult to understand at first. However, it is imperative to understand these terms in order to gain an understanding of how you can secure credit in the best possible manner and avail the best terms while doing so.
The most important terms you will come across while applying for a loan are CIBIL score and the Marginal Cost of Funding-based Lending Rate (MCLR). Both of these terms are closely related since MCLR refers to the lending rate that banks charge while the CIBIL score is an assessment of a potential borrower’s creditworthiness.
Understanding these terms and the link between CIBIL score and MCLR can be crucial in determining the terms of your loan. Through Bajaj Markets, you can easily avail a personal loan of up to Rs. 50 Lakhs with interest rates starting as low as 10.49%. Not only is the personal loan unsecured, but you can also repay it over a flexible tenure ranging between 1 and 5 years.
Previously, banks decided their lending rate as per the Base Rate decided by the Reserve Bank of India (RBI). In recent years, however, MCLR has emerged as the new standard. It acts as the minimum interest rate that banks can charge and below which, they are not allowed to charge. Starting April 1, 2018, the RBI initiated its facility for linking old loans’ base rates to the MCLR system to assist borrowers who had availed credit under the previous Base Rate system.
The Marginal Cost of Funding-based Lending Rate is derived from several factors. Read on below to learn what these are.
The marginal cost of the funds availed
The premium applicable on the repayment tenure, which helps pay off long-term loans’ risks
The cost of the Cash Reserve Ratio (CRR)
While the RBI’s Base Rate previously depended on the minimum rate of return and the average cost of funds, the MCLR more closely reflects the Repo Rate set by RBI, which is the rate at which RBI lends money to commercial banks. As a result, changes in Repo Rate result in changes to the MCLR as well. If the Repo Rate is low, banks will be able to offer credit to borrowers with lower interest rates as well.
Post March 2018, RBI mandated that all lending should happen as per the MCLR. The MCLR applicable on a loan will remain the same for either a 1-year period or for a lower tenure since banks can choose to opt for an MCLR that remains the same across a year or 6 months. However, banks can also opt to include a slight interest percentage over the MCLR on any of the loans they offer. As a result of these changes, loan interest rates are now reset annually as per the MCLR benchmark for loans that either have a floating interest rate or a fixed interest rate with a repayment tenure shorter than 3 years.
The CIBIL score is more personal and determines the creditworthiness of a borrower. Generated by credit rating agency TransUnion CIBIL, the CIBIL score is calculated based on a borrower’s financial history. It takes into consideration the different accounts the borrower has, the amount of credit they have availed, the outstanding credit amount they are yet to repay, and their debt-to-income ratio. Additionally, the CIBIL score generates the score after gathering data from different market lenders regarding the borrower’s repayment history. For instance, if you are late on paying your credit card bills, your CIBIL score could be negatively impacted.
A good CIBIL score becomes crucial when availing a loan or credit card, or any other form of credit. Since it indicates a borrower’s creditworthiness, it helps the lender assess whether the borrower will be able to repay their loans or credit card bills in time. As a result, the CIBIL score and report are studied keenly by lenders before offering a loan to a potential borrower.
The CIBIL score and MCLR both directly impact the possibility of a borrower securing a loan and the interest rate at which they are able to secure a loan. Even through Bajaj Markets, you require a credit score of at least 700 in order to avail a personal loan of up to Rs. 50 Lakhs. Since the loan offers several benefits, including its flexible repayment tenure and low interest rates, it is in your best interest to ensure that your credit score remains above 700.
While there is no direct relationship between a CIBIL score and MCLR, it is important to understand how they both impact your lending capacity. If your CIBIL score is higher than 750, you need never worry about getting your loan application rejected. However, if your CIBIL score is low, you will be charged extremely high interest rates in order to avail a loan.
MCLR determines the lowest interest rate chargeable by banks on loans and other forms of credit since floating interest rates are determined as per MCLR. However, in order to ensure that you can avail these low interest rates, you are required to maintain a high CIBIL score.