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Personal Loan
What is MCLR? Meaning, rate, and how it works in banking
Key Takeaways
MCLR (Marginal Cost of Funds-Based Lending Rate) is the minimum rate below which banks typically do not lend.
- It directly impacts your personal loan interest rate and EMIs.
- Changes in MCLR affect your loan at reset intervals, not immediately.
- Understanding MCLR helps you compare lenders, plan EMIs, and reduce borrowing costs.
What is MCLR in banking?
The Marginal Cost of Funds based Lending Rate (MCLR) is an internal, RBI-mandated benchmark rate that defines the minimum interest rate a bank can charge for loans. A bank determines its minimum interest rate by considering factors such as its cost of funds, operating costs, and profit margin. MCLR was introduced in 2016 to improve transmission of policy rates and applies to various loans like home and personal loans.
READ MORE
How does MCLR work in loan pricing?
Your final loan interest rate is calculated as:
Effective Lending Rate = MCLR + Spread
MCLR → Base benchmark set by the bank
Spread → Additional charge based on your credit profile
What determines your spread?
Credit score
Income and employment stability
Loan tenure
Relationship with the bank
This means two borrowers can get different interest rates even under the same MCLR.
Components that determine MCLR
MCLR is calculated using multiple cost factors:
Marginal cost of funds
Cost of raising new deposits and borrowings
Negative carry on CRR
Cost of maintaining reserves with RBI without earning interest
Operating expenses
Administrative and operational costs
Tenor premium
Additional cost for longer-duration loans
Banks publish MCLR across different tenors:
Overnight
1 month
6 months
1 year
Each tenor applies to different loan types.
How MCLR impacts your personal loan and EMIs
MCLR affects your loan through rate revisions at reset intervals.
When MCLR increases:
EMI may increase or
Loan tenure may extend
When MCLR decreases:
EMI may reduce
Total interest cost decreases
Important:
Unlike repo-linked loans, MCLR changes are not immediate. They apply only at your loan’s reset period.
MCLR vs Repo-linked lending rate: Key difference
Feature |
MCLR-based Loans | Repo-linked Loans |
| Benchmark Type | Internal (bank-driven) | External (RBI repo rate) |
| Rate Changes | Slower transmission | Faster transmission |
| Stability | More stable | More volatile |
| Transparency | Moderate | High |
Which is better?
MCLR loans → Better during volatile or rising rate cycles (more stable)
Repo-linked loans → Better when interest rates are falling (faster benefit)
Why understanding MCLR matters for borrowers
Knowing how MCLR works helps you:
Evaluate the true cost of borrowing
Compare loan offers across lenders
Decide the right time to borrow
Plan refinancing when rates drop
Example: How MCLR affects your loan
Let’s say you take a ₹10 lakh personal loan:
MCLR = 8.00%
Spread = 1.20%
Final interest rate = 9.20%
If MCLR rises by 0.30%:
New rate = 9.50%
Depending on your reset cycle:
Your EMI may increase
Or your tenure may extend
Even a small change can significantly impact your total interest paid.
How to plan better with MCLR-based loans
Before applying, you should:
Check the current MCLR rates of banks
Understand your loan’s reset period
Compare with repo-linked options
Use an EMI calculator to test scenarios
This ensures you avoid surprises in future repayments.
FIRSTmoney: Simplifying borrowing beyond benchmarks
While MCLR influences loan pricing, digital-first solutions like FIRSTmoney by IDFC FIRST Bank focus on making borrowing simple and transparent.
Key benefits:
Competitive interest rates (starting from 9.99% p.a.)
100% digital process with no document uploads
Instant approvals and disbursal within 10 minutes
Zero foreclosure charges
On-demand loans from approved loan offer
You can also use a personal loan EMI calculator to align repayments with your financial goals.
Conclusion
Understanding MCLR is essential for making informed borrowing decisions in India. Since it directly influences your loan interest rate, tracking its movement and structure can help you:
Reduce borrowing costs
Plan EMIs effectively
Choose the right loan type
With the right knowledge and tools, you can navigate loan decisions with greater clarity and financial confidence.
Frequently Asked Questions
What is MCLR in simple terms?
MCLR is the minimum interest rate below which banks usually do not lend.
Does MCLR affect all loans?
It primarily affects bank loans like personal loans, home loans, and business loans linked to MCLR.
How often does MCLR change?
Banks review MCLR monthly, but changes impact your loan only at the reset period.
Is MCLR better than repo rate?
It depends:
MCLR offers stability
Repo-linked loans offer faster rate benefits
Can MCLR reduce my EMI?
Yes, if MCLR decreases and your reset date arrives, your EMI or tenure may reduce.
Disclaimer
The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.
The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirst.bank.in for latest updates.
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