Home loans have become an inevitable truth in India. Since more and more people are planning to buy their own home, it proves to be the easiest financial alternative. However, there are a lot of things related to home loans which borrowers still don’t know about. One such thing is interest base rate and MCLR home loan.
If you are wondering what is MCLR, then let us tell you that it is related to the financing interest rate. Even though both topics are somewhat connected, there is a slight difference.
Knowing this difference can allow you to make a better choice. It will help when you are looking to borrow a home loan. To increase your knowledge about this topic, make sure you read the article till the very end.
What is Home Loan Base Rates?
Let us start the article by explaining what exactly is the base rate. It is the interest percentage which is decided by India’s central bank. This rate acts as a benchmark for all the lending and financial service providers. The central bank in India is the Reserve Bank of India (RBI).
The aim behind creating a base interest rate is to make the entire transaction more transparent for the borrowers. The concept is very simple, once the central bank announces its base rate, banks can then finalize an interest percentage.
Each bank tries to quote the lowest rate to attract more borrowers. However, these financial institutions are not allowed to put anything below the base rate. Not even the MCLR home loan is lower.
Whatever they might want to offer, it needs to be higher than the home loan base rate decided by the Reserve Bank of India.
What is MCLR on Home Loans?
To answer the question of what is MCLR, we will start with its definition first. The abbreviation stands for Marginal Cost of Lending Rate. It is a concept which is utilized by every bank in India.
The major difference between a home loan base rate and MCLR home loan is that it is different for each bank. Every financial institute comes up with their own MCLR rates every month.
Besides, these rates majorly depend on the tenor and type of financial service. For example, if the tenor of your loan is 30 days, 6 months, and 1 year respectively, then the MCLR will also be different for all three categories.
Also, when it comes to readjusting the interest rate of your loan after its tenor is over, it is done based on that months’ MCLR.
To put it simply, imagine that you took a home loan in March of 2016 for a year. Hence, in March of 2017, your interest rate will depend on that months MCLR.
What is Better – Base Rates or MCLR?
Both interest rate criteria have their own benefits and limitations. In some cases, MCLR is considered a good option especially when you are looking for home loans.
According to RBI home loan guidelines, MCLR Home Loans can prove to be beneficial especially in short-term. However, it cannot be predicted when you are looking for long-term home loans.
On the other hand, many borrowers consider home loan base rate to be an ideal choice. These are people who are looking for long-term loans and require time for repairing it in full. In other words, deciding which option is better between the two completely depends on your loan requirement and tenor.