RLLR vs. MCLR: Full Form, Meaning, and Key Differences

When you dream of owning a home, a home loan is often the best way to make it a reality. Financial institutions offer loans with either the Repo Linked Lending Rate (RLLR) or the Marginal Cost of Funds Based Lending Rate (MCLR). To make an informed decision about your home loan, it is crucial to understand these two loan rate mechanisms in detail. In this article, we explore the full forms, meanings, calculation methods, and key differences between RLLR and MCLR.

What is the Repo Linked Lending Rate (RLLR)?

The Repo Linked Lending Rate (RLLR) is directly linked to the Repo Rate, which is set by the Reserve Bank of India (RBI). RLLR ensures transparency and enables faster transmission of changes in the repo rate to loan interest rates.

How Does RLLR Work?

• Repo Rate: The interest rate at which commercial banks borrow money from the RBI.

• Spread: An additional percentage added by banks to cover operational costs and profit margins.

The formula to calculate RLLR is:

RLLR = Repo Rate + Spread

For example, if the current repo rate is 6.5% and the bank’s spread is 2%, the RLLR will be 8.5%. The loan interest rate moves in tandem with changes in the repo rate, leading to more dynamic and transparent adjustments.

What is the Marginal Cost of Funds Based Lending Rate (MCLR)?

The Marginal Cost of Funds Based Lending Rate (MCLR) is an internal benchmark used by banks to set the minimum lending rate. It is influenced by the bank’s cost of funds, making it a relatively stable but slower mechanism for rate transmission.

How is MCLR Calculated?

The formula to calculate MCLR is:

MCLR = Marginal Cost of Funds + Operational Costs + Tenor Premium

• Marginal Cost of Funds: Includes the weighted average cost of deposits and borrowings.

• Operational Costs: Covers the expenses incurred by the bank to run its operations.

• Tenor Premium: Accounts for the loan's duration and associated risks.

MCLR ensures that banks lend responsibly while balancing profitability and compliance with RBI regulations.

Key Differences Between RLLR and MCLR

Advantages and Disadvantages of RLLR

Advantages

1. Faster Rate Transmission: Changes in the repo rate are quickly reflected in loan EMIs.

2. Transparent: Borrowers can understand and predict loan interest fluctuations based on the repo rate.

3. Dynamic Adjustments: Beneficial during repo rate cuts.

Disadvantages

1. Frequent Changes: EMIs may rise if the repo rate increases.

2. Higher Risk for Borrowers: Less predictability during an economic downturn.

Advantages and Disadvantages of MCLR

Advantages

1. Stability: Interest rates remain unchanged for longer periods (reset semi-annually or annually).

2. Predictable EMIs: Ideal for borrowers who prefer steady repayment schedules.

Disadvantages

1. Slower Rate Transmission: Borrowers may not immediately benefit from repo rate cuts.

2. Less Transparent: Complex internal calculations make it harder for borrowers to understand.

Which is Better: RLLR or MCLR?

The choice between RLLR and MCLR depends on individual borrower preferences and market conditions:

• Choose RLLR if you want faster adjustments to repo rate cuts and are comfortable with dynamic EMI changes.

• Choose MCLR if you prefer stability and predictability in your loan repayments.

RLLR vs. MCLR: Summary of Key Differences

1. Benchmark Linking

• RLLR: Externally linked to the RBI’s repo rate.

• MCLR: Internally determined by the bank’s cost of funds.

2. Rate Adjustments

• RLLR: Rates change within three months, reflecting RBI repo rate adjustments.

• MCLR: Reset every six months or a year, making changes gradual.

3. Borrower Impact

• RLLR: Quick benefits during repo rate cuts but risky during rate hikes.

• MCLR: Stable interest rates, suitable for long-term financial planning.

Frequently Asked Questions (FAQs)

1. What is the Full Form of RLLR?

The full form of RLLR is Repo Linked Lending Rate, which is directly tied to the RBI’s repo rate.

2. What is the Full Form of MCLR?

The full form of MCLR is Marginal Cost of Funds Based Lending Rate, indicating the minimum rate at which banks can lend.

3. How Does RLLR Impact Home Loans?

RLLR links home loan rates to the repo rate, leading to faster EMI adjustments in response to RBI rate changes.

4. What is the Current MCLR Rate?

The current MCLR varies by bank but typically ranges between 6.80% and 7.65%.

5. What is the Current RLLR Rate?

The current RLLR rate, based on the repo rate, is around 8.40%, depending on the bank’s spread.

6. Which is Better for Home Loans: RLLR or MCLR?

RLLR is ideal for borrowers expecting repo rate reductions, while MCLR suits those seeking stability.

Conclusion

Understanding the differences between RLLR and MCLR can help you choose the most suitable home loan option for your needs. RLLR offers transparency and faster rate transmission, making it a dynamic choice. In contrast, MCLR provides stability and predictability, ensuring consistent EMIs. At Aavas Financiers, we offer both RLLR and MCLR-linked home loans to help you achieve your dream of homeownership. Explore our loan products today and take a step closer to your dream home.

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