The base rate is the minimum rate of interest that the RBI determines and every financial organisation has to follow. No lender can sanction a loan below that rate.
On the other hand, MCLR or is a new rule that came into existence since 2016, April 1st. This has replaced the base rate. With the help of this new rule, RBI wants to establish transparency. MCLR provides a floating kind of rate of interest that is actually beneficial for loan borrowers.’
Few necessary things that you need to know before deciding anyone between MCLR and base rate are:
The calculation of the base rate is done depending upon the average net worth, the cost that is incurred by the lenders and operations costs including the legal costs, stationery and depreciation costs.
Base rate got abolished due to many faults that RBI identified lately. Since the repo rate of the central bank influences the base rate, every financial organisation has to change the base rate with the change in the repo rate. But not all lenders lowered their base rate according. And this is why floating interest rate system came into existence.
Since many lenders did not change the base rate accordingly, it created a problem for the loan applicants and played with customer sentiments. This also created a negative impression and thus rules have to be changed immediately.
Finally you now what is MCLR rate and base rate in loan. Now it is a really helpful change for the loan applicants as they can get the benefits of the floating interest rate. But before you apply for a loan, make sure you talk to your lender and discuss in details.
Additional Read: How To Choose Best Rate For Home Loan Between Mclr And Base Rate?
