Any Home-loan seeker knows that the lower the interest rates, the lesser the instalments will be and the loan will also be repaid back earlier. Of late, however, a lot of discussion is taking place about two types of interest rates which have been introduced. These are Base Rate and MCLR. What are these two and which one is more beneficial, let’s find out.
This was introduced in 2010 by the RBI (Reserve Bank of India) and refers to the minimum interest rates at which lenders can offer loans to customers. This prevents lenders from providing loans to customers below a certain rate of interest.
Do you know what is MCLR? This is also known as the Marginal Cost of Funding based Lending Rate. This was introduced by the RBI in 2016 and replaced the base rate system of lending. This was done with the intention that banks pass on the benefit of any rate cuts to its customers and also that banks do not provide loans to borrowers below a certain rate.
Differences Between the Two
Base rate does not take into account the repo rate for the calculation of interest. Also, the base rate is the same for all loan.
On the other hand, in the case of MCLR, the repo rate is included in the calculation of interest rate and the MCLR varies according to the loan being opted for.
Should You Switch?
The option applies only if you have taken a loan before 31st March 2016. Any loans which have been taken after this date will come under the MCLR. Next, should you switch or not will depend entirely on the cost of your loan. While borrowers can look forward to a reduction of interest rate when switching from Base Rate to MCLR.
However, a switching charge is incurred in the process which can be around 0.5%-0.6% of the total loan amount. Taking this into consideration, if the savings are a lot, then it pays to make the switch, otherwise, it is best to stick to the base rate.