MCLR Explained: What is Marginal Cost of Funds Based Lending Rate?

If you took a home loan or business loan a few years ago, chances are your interest rate is linked to MCLR. While newer loans are usually linked to the repo rate, MCLR is still important for many borrowers.

Understanding MCLR helps you decide whether to continue with your current loan or switch to a better interest structure.

What Is MCLR?

MCLR (Marginal Cost of Funds Based Lending Rate) is the minimum interest rate below which a bank cannot lend (except in special cases). It was introduced by the RBI in April 2016 to make lending rates more responsive to changes in policy rates.

Banks calculate MCLR based on:

• Marginal cost of funds (fresh deposits & borrowings)
• Operating costs
• Cash reserve ratio (CRR)
• Tenure premium

Types of MCLR

Banks publish different MCLR rates based on loan tenure:

• Overnight MCLR
• 1-month MCLR
• 3-month MCLR
• 6-month MCLR
• 1-year MCLR (most commonly used for home loans)

Your loan interest rate = MCLR + Spread (fixed margin).

How MCLR Affects Your Loan EMI

Changes in MCLR affect your EMI only on the reset date, not immediately.

Example:

• Loan linked to 1-year MCLR
• Interest rate resets once every year

If MCLR reduces today, your EMI reduces only at the next reset date.

MCLR vs Repo Rate–Linked Loans

This is why RBI now encourages external benchmark–linked loans.

Should You Switch from MCLR to Repo-Linked Loan?

Switching may be beneficial if:

• Repo-linked rates are significantly lower
• Your outstanding loan amount is high
• Tenure remaining is long

However, banks may charge a conversion fee, so a proper cost-benefit analysis is important.

Who is Still on MCLR?

• Borrowers who took loans before Oct 2019
• Business loan borrowers under older agreements
• Borrowers who never opted for rate conversion

How Direct Credit Helps You

At Direct Credit, we analyze whether your MCLR-linked loan is costing you extra. We help you compare repo-linked options, negotiate better spreads, and guide you through loan conversion or balance transfer smoothly.

Contact Us

Still paying higher EMIs on an MCLR-linked loan? Let the experts at Direct Credit review your loan and help you switch to a more cost-effective interest structure. Call us today at 9010031003 for honest advice, EMI savings, and faster processing.