Education Loan

How MCLR Affect Your Education Loan?

How MCLR Affect Your Education Loan?

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Get insights on MCLR's effect on education loan interest rates, the advantages of moving from base rate, and practical borrowing tips.

Rohit Gidwani
Updated on:  11 Mar 2024  | Reviewed By: 
| 89 | 5  min read

Understanding the details of education loans can often feel overwhelming, especially when terms like MCLR come into play. If you're asking yourself, "What is MCLR in education loan?" you're in the right place. Since its introduction by the RBI in 2016, the Marginal Cost of Funds Lending Rate (MCLR) has significantly changed how banks determine interest rates, promoting greater transparency and effectiveness.

This blog aims to simplify MCLR, highlighting how it influences the interest rates of education loans and what it means for borrowers switching from Base Rate to MCLR. Through straightforward explanations and practical advice, we're here to help you make sense of how MCLR affects your education loan, enabling you to make well-informed decisions about your financial future.


What is MCLR in Education Loan?

MCLR is a benchmark rate set by banks to determine the interest rates on loans, including education loans. Introduced by the Reserve Bank of India (RBI) in April 2016, MCLR replaced the Base Rate system to increase transparency and efficiency in how banks set interest rates. The calculation of MCLR includes several key components:

  • list items Marginal cost of funds: The cost incurred by banks to raise new funds.
  • list items Operating costs: The expenses banks incur to operate and provide services.
  • list items Tenor premium: Additional interest banks charge based on the loan's duration.
  • list items Negative carry on account of CRR: The cost banks bear for maintaining the Cash Reserve Ratio without earning any return.


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How Does MCLR Impact Education Loans?

The adoption of MCLR has significantly influenced the pricing of education loans in India. Here’s how:

  • list items Dynamic interest rates: Since MCLR is subject to periodic revisions, typically every month, the interest rate on an education loan can change, affecting the loan's EMI.
  • list items Loan tenure consideration: The MCLR system considers the loan tenor, influencing the interest rate applied to short-term vs. long-term loans differently.
  • list items Transparency and lower rates: MCLR's introduction has led to a more transparent loan pricing mechanism, potentially offering lower interest rates to borrowers due to the competitive and dynamic nature of MCLR.

MCLR vs. Other Benchmark Rates

Comparing MCLR with other rates like the Base Rate and Repo Linked Lending Rate (RLLR) highlights its advantages:

  • list items Base Rate vs. MCLR: MCLR provides a more realistic and transparent approach to setting loan interest rates, ensuring quicker transmission of policy rate changes by the RBI to borrowers.
  • list items RLLR: While RLLR is directly linked to the RBI's repo rate, making it highly transparent and responsive to changes, MCLR offers a balance between stability and responsiveness due to its calculation methodology, incorporating various factors beyond the repo rate.

Pros and Cons of MCLR for Education Loans

MCLR comes with its set of benefits and challenges for borrowers. Some of them are shown in the table below:

Pros Cons

Transparency: MCLR ensures that borrowers benefit from a transparent rate-setting process.

Rate volatility: Borrowers might face uncertainty due to potential fluctuations in their loan's interest rate and EMI amounts over time.

Potential for lower rates: As MCLR is influenced by multiple factors, including the RBI's policy rates, borrowers could benefit from lower interest rates in a declining rate scenario.

Complexity: Understanding how MCLR is calculated and its impact on loans can be complex for some borrowers.

Responsive to economic changes: MCLR adjusts more quickly to economic conditions, potentially leading to more favorable loan terms in response to changes in the financial environment.

Reset period uncertainty: The reset period of MCLR-linked loans can introduce unpredictability in financial planning for borrowers, as interest rates are subject to change at the time of reset.

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Switching from Base Rate to MCLR

For borrowers with loans linked to the Base Rate, understanding "what is MCLR in education loan?" could offer the possibility of benefiting from lower rates. Here's what to consider:

  • list items Assess the potential impact: Evaluate how switching to MCLR could affect your loan's interest rate and EMI.
  • list items Understand the process: Banks usually provide a mechanism for borrowers to switch from the Base Rate to MCLR, which may involve certain fees or terms and conditions.

Future of MCLR and Education Loans

The future landscape of MCLR and its impact on education loans will likely continue to evolve, influenced by economic conditions, RBI policies, and banking practices. Borrowers should stay informed about:

  • list items RBI guidelines: Any changes in MCLR guidelines by the RBI could affect loan interest rates.
  • list items Market trends: Economic indicators and market trends can influence MCLR revisions, impacting education loan rates.


In summary, MCLR plays a critical role in determining the interest rates on education loans, offering benefits like transparency and potentially lower rates. However, borrowers must navigate its complexities and stay informed about changes to manage their loans effectively. By understanding MCLR and its implications, students and families can make better financial decisions regarding their education financing. For those looking to explore further or need personalized guidance, GyanDhan is here to assist. Leverage GyanDhan's expertise by checking your eligibility with us, to navigate your education loan options seamlessly and make the most informed choices for your future.


Frequently Asked Questions

Can I choose between MCLR and RLLR for my new education loan?

Many banks offer both MCLR-linked and Repo Rate Linked Lending Rate (RLLR) options for new education loans. Your choice depends on your preference for rate stability versus responsiveness to RBI policy changes.

How often can MCLR rates change and affect my education loan?

MCLR rates can change as frequently as monthly, but the impact on your education loan depends on your loan agreement's specified reset period, commonly annual.

What happens to my education loan if the MCLR decreases after I've locked in my rate?

If MCLR decreases, your interest rate might decrease at the next reset period if you have a floating rate loan, potentially lowering your EMI or loan tenure.

Are there any fees associated with switching from Base Rate to MCLR for my education loan?

Banks may charge a nominal conversion fee for switching from Base Rate to MCLR, varying by institution. It's advisable to consult your bank for the specific charges.

Is it possible to revert back to the Base Rate system after switching to MCLR for my education loan?

Generally, once you switch to MCLR from the Base Rate, banks do not allow a reversal back to the Base Rate system due to its less favorable transmission of policy rates.

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