RLLR vs MCLR: Full Form, Meaning, and Key Differences
If you are going to avail a loan from a commercial bank for various purposes (including a home loan), you must gain some knowledge on RLLR vs. MCLR. The commercial banks use RLLR and MCLR mechanisms to determine the interest rates on home and other forms of loans.
These are two different banking mechanisms, and they differ in some respects. If you are seeking a home loan or other forms of loan, you should know the meaning of repo lending rate. You must also be aware of the marginal cost of funds-based lending rate to know the nuances of norms pertaining to interest rates.
Let us give the instance of a home loan. When you approach a commercial lending bank for a home loan, the bank authorities will offer you two options: RLLR module or MCLR system.
Now, we will try to understand the full form of these two words and their meaning and relevance!
Full Form and Meaning of RLLR and MCLR
The acronym RLLR stands for Repo Linked Lending Rate, while the initials MCLR denote Marginal Cost of Funds Based Lending Rate.
RLLR (Repo Linked Lending Rate): Under this system, the interest rate of bank is directly related to the repo rate fixed by the Reserve Bank of India (RBI). It changes from time to time. You should know that the repo rate means the interest at which commercial banks borrow money from the RBI. This is calculated as the sum of the repo rate and an additional percentage added to the loan by banks to make up or cover operational costs and margin of profit.
MCLR (Marginal Cost of Funds Based Lending Rate): MCLR also called base rate in the past is basically an internal benchmark interest rate. A commercial bank cannot advance loan at a rate of interest which goes below its pre-determined minimum interest rate. When deciding about its MCLR, the lending bank considers various factors, including operational cost, existing repo rate, CRR (Cash Reserve Ratio), and SLR (Statutory Liquidity Ratio) among other key indicators.
Key Differences between RLLR and MCLR
The basic difference between the two is that RLLR gives you higher transparency but is subjected to faster change in interest rates due to the repo-factor. On the other hand, MCLR offers you more stability and predictability.
Now, we’ll discuss basis of their key differences:
Benchmark Link
RLLR: All operational aspects are directly linked to the responding rating rate set or reset by the RBI. This makes RLLR linked to an external benchmark, which is the RBI.
MCLR: The cardinal feature of MCLR is that it is linked directly to the internal benchmark (not like the external benchmark, i.e., the RBI). The calculation of MCLR is done by the individual bank on the basis of its own cost of funds.
Factor of Transparency
RLLR: If you want to go for higher transparency on your loan, you should go for this system. This is due to the reason that as and when the repo rate is changed by the RBI, this change is directly reflected in the RLLR. What is more, you can also track the benchmark yourself (as a borrower).
MCLR: Since the determination of the rate is an internal matter on the part of the lender bank, it is less transparent. As a result, many issues pertaining to the interest on the loan may not sound very clear to you (as a borrower).
Reset Period
RLLR: Every three months, the resetting is done. This directly means, the interest rate can be revised quarterly. As a result, you find your interest rate has gone up due to the factor of external benchmarks (i.e., the RBI).
MCLR: In this type of loan, the reset period mostly ranges from 6 months to 1 year. This resetting, however, depends upon the individual lending bank. As a result, the interest rate is not revised frequently like the RLLR.
Transmission Speed
RLLR: Interest rates may change more frequently in this type of loan. This is due to the reason that the RBI changes its repo rate periodically. As a result, the interest rate may also change more quickly than the MCLR.
MCLR: Transmission speed is far less in this type of loan as it operates on the basis of the bank’s own in-house benchmark. As a result, the changes in operational cost of funds are transmitted more gradually.
Factor of Change in Interest Rates
RLLR: In this type of loan, the interest rates may change more frequently. The reason for this is that the interest rate calculation is not done by the lending bank’s internal benchmark but is based on the external benchmark and changes in the repo rate of RBI.
MCLR: Due to the factor of the internal benchmark of an individual bank, the interest rates change slowly. Usually, this interest rate change is dependent on the bank’s internal cost of funds.
Read More: The Importance of NOC After Closing Your Loan
In Conclusion
RLLR vs. MCLR should form the most important plank of your plan to borrow a home loan or any other form of loans from a commercial bank. A comparison of RLLR and MCLR will enable you to know that the RLLR is more transparent but is subject to changes in interest rates due to the factor of the repo rate of the RBI.
On the other hand, the MCLR may sound more stable over the issue of interest change as the whole interest formula is calculated by the lending bank’s internal calculation.
Frequently Asked Questions
Ans) This totally depends on you to decide. Now that you know the differences between the two types of loans and their stipulations, you should make your own choice. Moreover, you know the relative merits and demerits of loans on RLLR and MCLR modules.
Ans) Yes! The home loans are directly related to changes in the repo rate, which may change from time to time. Almost all lending banks link their loans to the repo rate. There, however, are some private lending bodies that don’t link their home loans to the repo rate.
Ans) For all practical purposes, the MCLR module is a better solution from the angle of stability on home loans. Being directly linked to the repo rate, the RLLR is subjected to volatility as the repo rate keeps on changing. But MCLR’s loan formula is based on its internal calculation system. As a result, this apparently is more stable.
Ans) Yes, you can do that. To switch over the account, you have to approach the respective bank from which you have taken the loan. You may have to pay a one-time account switchover fee plus taxes for this (with a written request).
Ans) It is a matter of individual choice. Legally, you can do this. But you must keep in mind that you have to pay an extra cost for it: a one-time switchover. It may also involve an additional processing fee or service charge.
