The marginal cost of funds based lending rate (MCLR) is the minimum interest rate below which a bank cannot offer loans to the borrowers. It works as an internal benchmark or reference rate for the bank. The MCLR methodology for fixing interest rates on loans was introduced by the Reserve Bank of India with effect from April 1, 2016. This new methodology acts as a replacement of the base rate system introduced in July 2010. In simpler terms, all the loans sanctioned and credit limits renewed, with effect from April 1, 2016, would be priced with reference to the Marginal Cost based Lending Rate (MCLR). Thus, a lower RBI MCLR will mean a lower interest rate which will reduce the repayment burden significantly. A cut in current MCLR rate will certainly benefit all car loan and home loan borrowers.
While availing any kind of loan, MCLR will certainly play a crucial role in deciding the home interest rate levied on the loan. Therefore, it is necessary to understand the intricacies associated with MCLR. However, since the internet is flooded with various myths about MCLR-linked loans, a large number of loan applicants still remain uninformed about the various aspects related to MCLR cut.
Let’s debunk some of the most common misconceptions about the MCLR cut that will help you understand its impact on your loan repayment.
Myth 1: The interest rate is reduced instantly
A large number of existing borrowers feel that the MCLR rate cut means that the interest on housing loan will be decreased instantly. However, this is not true. The borrowers are expected to wait until the reset period is over in order to enjoy the benefits of the MCLR cut. This means that the borrowers cannot transfer their loan to MCLR unless the reset period of the bank is over. It is to be noted that the reset period may vary from one bank to another.
Myth 2: MCLR cut is directly proportional to the interest rate cut
Most home loan borrowers have confusion regarding the interest rates charged by the banks. They often think that the MCLR cut is directly proportional to the home loan interest rate cut for new borrowers. However, this holds true only for existing borrowers and not for new borrowers.
MCLR is only applicable to the banks governed by the Reserve Bank of India (RBI). Housing finance companies are not influenced by this rate cut.
Myth 3: Shifting home loan from base rate to MCLR is always profitable
Though shifting the home loan to MCLR can be fruitful in some cases, it also has its own set of disadvantages. Under the base rate, the housing loan reset date is every three months, whereas, in the case of MCLR, the reset period is of one year. Therefore, even if you shift, the housing loan interest rate will remain the same for one year or whatever the reset period is.
Keeping all these factors in mind, it is recommended that the borrowers should take financial decisions only after doing all the relevant calculations and consulting a financial expert. If you are looking forward to availing a home loan, you must settle for a loan with the most competitive interest rate. Bajaj Finserv Home Loan comes with an attractive home loan interest rate and other lucrative features such as flexible repayment options, less processing fee and no hidden charges. Instant approval of the home loan application and quick disbursal are some of the other advantages of availing a Bajaj Finserv Home Loan. You can also avail Bajaj Finserv home loan under PMAY and avail various benefits under Pradhan Mantri Awas Yojana.
Also, read about the perfect CIBIL score for home loans. You can also check your eligibility for home loan with the help of home loan eligibility calculator and monthly EMIs with the help of housing loan emi calculator.
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