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Understanding how banks set interest rates is important if you're planning to take a loan in India. Two common terms you may encounter are RLLR (Repo Linked Lending Rate) and MCLR (Marginal Cost of Funds based Lending Rate). These are benchmarks used by banks to determine the interest you pay on loans such as home loans, personal loans, or vehicle loans.
Knowing the difference between RLLR and MCLR, helps you determine how they affect your loan repayments. It's also important to know how these rates are calculated, how often they change, and what their pros and cons are to make an informed borrowing decision.
To better understand RLLR vs MCLR, it's important to first look at what each term means and how these benchmarks work.
RLLR stands for Repo Linked Lending Rate. It is directly tied to the repo rate set by the Reserve Bank of India (RBI). When the RBI changes the repo rate, banks that use RLLR adjust their lending rates accordingly. This makes the RLLR system more transparent and responsive to changes in monetary policy.
For example, if the repo rate is 6.50%, a bank may set its RLLR at 6.50% + 2.00%, making the effective rate 8.50%.
MCLR stands for Marginal Cost of Funds based Lending Rate. It is the minimum interest rate that a bank can offer for a loan. It is calculated using several internal factors such as the bank's cost of funds, operating expenses, and the tenure premium. Since it is based on internal cost estimates, changes in MCLR are less immediate and may not always reflect policy rate changes quickly.
If you're searching online for what is MCLR, it’s simply a benchmark that reflects a bank’s internal cost of funds and is used to decide lending rates.
Understanding the core differences between these two lending benchmarks is essential for borrowers. Here’s how RLLR vs MCLR compares across key aspects:
RLLR is directly linked to the RBI’s repo rate. Any change in the repo rate affects the RLLR almost immediately.
MCLR is based on a bank’s internal calculations. These include the marginal cost of funds, CRR (Cash Reserve Ratio), operational costs, and tenure premium.
Because RLLR depends on an external benchmark, it is considered more standardised. MCLR varies from bank to bank as it uses internal benchmarks.
RLLR-based loans are usually reset every three months. The reset date is linked to the review cycle set by the bank at the time of the loan agreement.
MCLR-based loans, on the other hand, are reset once every six to twelve months. This slower reset cycle means rate changes are not passed on to borrowers immediately.
This difference can affect how quickly your EMI changes after repo rate revisions.
RLLR offers higher transparency as the repo rate is published by the RBI and is the same across banks. Customers can easily track changes and calculate expected revisions.
MCLR lacks the same transparency. Banks calculate MCLR using proprietary methods, so the formula and components may not be fully visible to customers.
Additionally, RLLR reacts faster to repo rate movements, whereas MCLR may lag in reflecting such changes.
Borrowers with RLLR-linked loans may see more frequent EMI changes, which can benefit them during rate cuts but increase costs when rates rise.
MCLR-linked loans offer more stability. Since rate resets happen less often, EMI amounts may not change frequently, which some borrowers may prefer.
However, RLLR-linked loans are generally considered more favourable in a falling interest rate environment, while MCLR works better when rates are stable.
Both RLLR and MCLR come with their own set of advantages and limitations. Understanding these can help you choose the right lending rate for your financial goals.
Here are the pros and cons of RLLR:
More Transparent
RLLR is linked to the RBI's repo rate, which is publicly available and easy to track
Faster Rate Transmission
Any change in the repo rate gets reflected in the loan rate more quickly
Better for Falling Rates
If the RBI reduces the repo rate, borrowers benefit faster through lower EMIs
Higher Volatility
Frequent repo rate changes can lead to more frequent EMI adjustments
Less Predictability
Monthly budgeting may become harder if loan rates change often
Here are the pros and cons of MCLR:
Greater Stability
Interest rates do not change frequently, making EMIs more predictable
Customisation
Banks can offer slightly varied rates based on borrower risk, loan tenure, and other internal metrics
Lower Transparency
The formula used is internal to each bank and not always disclosed clearly
Slower Rate Pass-through
Borrowers may not immediately benefit from repo rate cuts by the RBI
Choosing between RLLR and MCLR depends on your financial situation and how comfortable you are with interest rate changes.
RLLR may be a better option if:
You want transparency and quick reflection of RBI rate cuts
You expect interest rates to fall or stay low in the near future
You are comfortable with periodic changes in your EMI amount
MCLR may suit you better if:
You prefer stable EMIs and less frequent rate changes
You want to avoid the uncertainty caused by rapid repo rate movements
You are taking a short-term loan and do not expect major RBI interventions
In general, new borrowers often find RLLR-linked loans more appealing due to better rate transmission. However, for borrowers who value stability, MCLR-based loans may still be preferable.
If you are currently on an MCLR-linked loan and are considering switching to RLLR, check with your bank about the terms, costs, and process involved. Switching may involve a nominal fee or a fresh loan agreement.
Understanding the difference between RLLR and MCLR is essential for making informed loan decisions. Both systems aim to set fair interest rates, but they operate differently.
RLLR is externally linked and reflects RBI changes more quickly, while MCLR is based on a bank’s internal cost structure and moves more slowly.
If transparency and faster rate benefits matter to you, RLLR may be the better choice. But if stability and predictability are priorities, MCLR could still be relevant.
RLLR is linked directly to the RBI’s repo rate, while MCLR is based on a bank’s internal cost structure. RLLR changes faster with repo rate revisions.
RLLR rates are generally reset every 3 months. MCLR rates are reset less often, typically every 6 or 12 months, depending on the loan agreement.
RLLR is more transparent because it is based on a publicly available benchmark. MCLR involves internal bank calculations that are not always disclosed clearly.
RLLR-based EMIs adjust faster when repo rates change. MCLR-based loans take longer to reflect changes, so the EMI remains unchanged for a longer period.
Yes, existing borrowers can request to switch from MCLR to RLLR. Banks may charge a nominal fee, and fresh documentation might be required.
MCLR is the lowest interest rate a bank can offer for loans, based on its cost of funds. It affects your loan’s interest and EMI.
The MCLR rate varies by bank and loan type. You can check the latest rate on your bank’s official website or RBI publications.
As of the latest update, SBI’s 1-year MCLR is subject to periodic revision. Please visit the SBI website for the current figure.
MCLR is the internal rate set by banks for lending, while the repo rate is the rate at which banks borrow from the RBI.
BLR stands for Benchmark Lending Rate. It was used before the introduction of the MCLR system in 2016.
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