Before taking a loan, it is important to know whether the money you are taking the loan will have to be repaid at the repo rate linked loan rate or the marginal cost of funds based lending rate. In such a situation, before taking a loan, one must understand the difference between these two rates.
RLLR vs MCLR: The central bank RBI has increased the repo rate by 0.90 percent in the last two months and now its rate is 4.90 percent. After the increase in the repo rate, it has become expensive to take loans from banks for home, car or other needs, but it does not affect everyone immediately. The reason why the effect of the increase in the repo rate is not the same on all loan customers, the reason why the loan rate depends on which factor is the repo rate or the marginal cost of the fund, which of the two is linked. This means that before taking a loan, it is important to know whether the loan you are taking will have to be repaid at the Repo Rate Linked Loan Rate (RLLR) or the Marginal Cost of Funds Based Lending Rate (MCLR). In such a situation, before taking a loan, one should definitely know about these two terms.
What do both mean?
As the name suggests, Repo Rate Linked Rate is linked to the repo rate fixed by the central bank RBI and is revised from time to time. The RLLR of all banks is different. It changes whenever the repo rate changes. On the other hand, the marginal cost of funds based lending rate is the rate below which you cannot take a loan from the bank. It is set as per RBI guidelines and is revised on an annual or half yearly basis.
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RLLR vs MCLR
- Benchmark linking: RLLR is the external benchmark linked to the repo rate of RBI, which means that it will also change as soon as there is a change in the repo rate. It has more transparency. On the other hand, MCLR is the internal benchmark in which the bank decides the interest rate according to its cost of funds. Not only the repo rate but also the banking system liquidity in deciding this. Low cost deposits etc. also play a role.
- reset period: In case of RLLR, the reset period is three months i.e. EMI can be revised every three months. On the other hand, in the case of MCLR, the reset period is six months or one year, that is, banks revise their interest rate on a half yearly or yearly basis, due to which there is a significant gap in changing the EMI of your loan.
- Transmission Rate: In the case of RLLR, you get the benefit of RBI’s rate cut immediately, but in the case of MCLR, it gets the benefit of a little late.
Still have confusion?
If you are getting confused even after knowing the difference between RLLR and MCLR, then you can decide the rate types of your loan like this. You will get more transparency in RLLR and whenever there is a cut in the repo rate, you will get the benefit immediately. On the other hand, the advantage of taking a loan on MCLR is when you think that the repo rate may increase.
(Input: Kotak Securities)