MCLR or RLLR loan: The Reserve Bank of India cut interest rates this year, and that gave some relief to people with loans, especially after the big 50-basis point rate cut in June. Borrowers are happy because it could mean lower EMIs. But there’s something very important they now need to decide should they choose a loan linked to MCLR or RLLR? These are two different systems that banks and NBFCs use to fix the interest rate on floating loans, and both work very differently.
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MCLR came in back in 2016 to replace the base rate system. It is not one fixed number. Each bank calculates its own MCLR based on how much it costs them to raise money, their running costs, and some extra costs for long loans and RBI rules. Big banks like SBI have better funding options and lower costs, so their MCLR rates are often lower than smaller lenders. But here’s the catch, the MCLR doesn’t change quickly. Even if the RBI reduces the repo rate, like it did this year, banks can delay cutting MCLR.
Even though the repo rate went down by 100 basis points this year, SBI still hasn’t changed its one-year MCLR. It’s stuck at 9% since November 2024. That means people with loans linked to MCLR haven’t seen any real benefit yet.
accordign to Business Today, Akhil Rathi, a finance expert, explains that even if RBI cuts the rate, borrowers on MCLR have to wait for the next reset period, which can be 6 months or even 12. “If your loan is linked to MCLR, the benefit doesn’t reflect immediately,” he said. So in that waiting time, people may end up paying more.
In 2019, RBI made it compulsory for banks to use an external benchmark for setting loan interest rates, and that’s when RLLR became common. RLLR is directly linked to the repo rate, which means that any change made by RBI gets passed on to borrowers quickly, sometimes within a month or two.
Rathi says RLLR loans are more transparent and reflect RBI rate changes faster. That means if the repo rate drops by 0.5%, borrowers might see a lower EMI soon. This is helpful because people can see the effect of RBI’s decision right away. But the downside is, if the repo rate increases, RLLR loans will also get expensive just as fast. That can create a burden if your monthly budget is tight.
It’s important to know that RLLR loans don’t come at the exact repo rate. Banks add something called a credit risk premium, which is usually between 2.5% and 3.5%. This depends on how risky the bank thinks the borrower is.
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Both loan types have their good and bad sides. RLLR loans are fast to adjust and more open about how the interest rate is calculated. So if you can handle changes in EMI and want quick benefits when RBI cuts rates, RLLR is better. But if you want stability and don’t want surprises every few months, MCLR loans feel safer.
Rathi says that in today’s environment, RLLR seems to be better because it gives faster relief, has more clarity, and helps with better EMI planning.
People can also switch from MCLR to RLLR or the other way around. But banks charge a fee for that. So before changing, it’s a good idea to check what works best for your income, loan type, and how the market is moving.
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