When taking a home loan, personal loan, or any other loan for that matter; the first thing people check is the interest rate. Well, if you do it the same way, you are on the right track but not completely. It is true people should check or compare their credit options based on the interest rate offered, but they must also check the type of interest rate being offered.
As of now, there are two types of interest rates being offered: base rate and MCLR rate. While MCLR system of interest calculation is the one being currently used, base rate was the one MCLR replaced on 1st April 2016.
Why was Base rate Replaced by the MCLR?
Though the real purpose of replacing the base rate lending system with the MCLR system was to ensure every borrower is entitled with the benefiteverytime RBI announces a rate cut; the action also lowered down the existing home loan interest rates by a considerable margin. To understand the exact difference MCLR rate brought in, you can compare the interest rate offered before and after April 1st, 2016.
How Does Base rate and MCLR Differ?
Talking of the differences between MCLR lending patter and base rate, there isn’t much to say. However, there is one thing that sets apart the two patterns from each other. The base rate lending system was launched to ensure the bans do not lend below a specific rate, be it any.
The MCLR rate has the same purpose but it includes repo rate of the RBI while calculating the applicable interest rate. On the other hand, base rate calculations didn’t involve repo rate.
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