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RLLR vs MCLR: Difference between RLLR and MCLR

Created on 23 Apr 2020

Wraps up in 4 Min

Read by 21.6k people

Updated on 10 Sep 2022

Owning a house is a dream of many. As much as you focus on the details of your home, equal importance must be given to knowing the key details about the loan that monetizes your dream. You have two choices in hand. You can either run to the near-by Kirana store to purchase your supplies or visit popular market corners like Sarojini Market, Newmarket, etc where you can get your stuff at an Rs.50 or 100 less. 

Similarly, there are two options offered to any home loan buyer. You can either take your loan based on the Repo Linked Loan Rate (RLLR) or Marginal Cost of Fund Based Lending Rate (MCLR). So how do both differ and which is best for you? Let's find out,

Before you understand the differences between the two you must understand some crucial terms. 

  • Spread- This is the difference between the rate at which the bank charges its lenders and the rate at which it pays its customers. This is supposed to play a major role in the bank's profits. 

  • Repo rate- Commercial banks borrow money from RBI to meet their various obligations. The rate at which RBI lends to such a commercial bank is the repo rate. 

MCLR rates

MCLR in simple terms is an internal benchmark rate below which the bank is not supposed to lend its customers. This is set by the bank itself without forgoing the various regulations set forth by the RBI. It is like the fixed rate that the shopkeeper sells his products irrespective of the actual market price. He may take into consideration the operating costs, labor costs, and so on. Just like that MCLR rates are dependent upon Tenor premium, operating cost that the bank incurs, Cash reserve ratio (CRR), and any other marginal costs incurred. This methodology came into existence from April 2016 onwards, replacing the base rate system. These rates are renewed half-yearly or yearly. 

RLLR home rates 

RLLR, on the other hand, is a lending rate that is linked or is based on the repo rate. This is where spread comes into play. The base rate along with the spread constitutes the actual interest rate. This methodology was introduced from October 2019. Here the rate will move up or down with the bank's repo rate. This is more like the market places where you can see rate changing as per the various economic factors. 

RLLR vs. MCLR 

A few crucial differences include, 

MCLR

RLLR 

This is an internal benchmark rate

This is an external benchmark rate that is linked to the RBI's repo rate.

The rates are revised every 6 months or once in a year. 

The RLLR rates are revised once in every 3 months. 

The transmission of changes or rate cuts is comparatively slower. For instance, due to the spread of the pandemic, the RBI reduced the repo rate. It might take a while before that benefit is reflected in your interest rates. 

The transmission of such rate cuts is faster and quick. 

Nothing explains better than an example. Say X is about to buy a house and is looking for a housing loan. He wants to take a loan of 30,00,000 for 15 years. Let's find his case under the two scenarios. 

When he acquires loan under MCLR

When acquires loan under RLLR 

For 15 years, when X takes a loan of 30 lakh he will be charged a rate of 8.15%. Hence his installment will be 28,930 monthly. So the total amount payable will be Rs.52,09,391

Here he will be charged 7.80% as his interest. This will account for an EMI of 28,324. Thus, the total amount that he will have to pay is 50,98,367. 

Hence, X will be saving 1,11,024 if he adopts to RLLR system. However, if you are taking a huge amount as a loan, then the difference between the two may not be a huge factor.

An RLLR home rate will help you maximize your savings. Especially, during times of crisis or national emergency, when the rates are cut your RLLR based loan will reflect the same. But MCLR linked home loan may delay passing the change on to its customers. Or they may not pass it stating the increased expenses or costs. RLLR always remains to be a highly reliable and transparent methodology than it's the counterpart. 

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Ayushi Upadhyay

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A Keen Learner. Tiny, brainy, and studious, this quiet one stays in her zone until she pops. And once she does, boy, are her comebacks snappy! There is no financial question that she can't answer through her magical blog-writing. 

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