How MCLR Affect Your Education Loan?
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:  03 Jun 2024  | Reviewed By: 
| 259 | 4  min read

Understanding the complexities of school loans may be confusing, especially when terminology like MCLR come into play. If you are wondering, "What is MCLR in an education loan?" you have come to the correct site. Since its adoption by the RBI in 2016, the Marginal Cost of Funds Lending Rate (MCLR) has drastically altered how banks set interest rates, encouraging better openness and efficacy.


This blog seeks to simplify MCLR by emphasizing how it affects interest rates on student loans and what it implies for borrowers who transition from Base Rate to MCLR. We're here to help you understand how MCLR affects your education loan, so you can make educated decisions about your financial future.


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What is MCLR in Education Loan?

The MCLR is a benchmark rate used by banks to establish interest rates on loans, especially education loans. The Reserve Bank of India (RBI) introduced the MCLR in April 2016 to replace the Base Rate mechanism, increasing transparency and efficiency in interest rate setting. The computation of the MCLR incorporates many crucial components:

  • list items Marginal cost of funds: The expense experienced by banks while raising additional funds.
  • list items Operating costs are the expenses that banks spend when operating and providing services.
  • list items Tenor premium: Banks charge additional interest dependent on the loan's length.
  • list items Negative carry on account of CRR: The expense that banks endure in maintaining the Cash Reserve Ratio without receiving a profit.

  • Read More About: Understanding External Benchmark Rate (EBR) in Education Loan


    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.

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    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.


    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 probable impact: Consider how moving to MCLR may effect your loan's interest rate and EMI.
  • list items Understand the process. Banks often offer a way for borrowers to move from the Base Rate to the MCLR, which may include fees or restrictions and conditions.
  • Sprinkles

    Future of MCLR and Education Loans

    The future landscape of MCLR and its impact on education loans is anticipated to alter in response to economic situations, RBI regulations, and banking practices. Borrowers should be advised about:

  • list items RBI Guidelines: Any modifications to the RBI's MCLR standards might have an impact on lending interest rates.
  • list items Economic variables and market developments might influence MCLR adjustments, hence affecting education loan rates.

    In conclusion, the MCLR plays an important role in calculating interest rates on student loans, providing benefits such as transparency and potentially cheaper rates. To properly manage their loans, borrowers must negotiate its complexity and remain up to date on changes. Understanding MCLR and its ramifications can help students and families make better financial decisions about their school funding. 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 get an education loan for pursuing MBBS in India?

    Yes, most banks and financial institutions in India offer education loans for students pursuing MBBS or other medical courses, covering tuition fees, hostel fees, books, equipment, and other related expenses.

    What are the eligibility criteria for an education loan for MBBS?

    Applicants must be Indian citizens, over 21 years old, and have secured admission in a recognized medical institution in India. The exact eligibility criteria can vary slightly between lenders.

    How much loan amount can I get for an MBBS course?

    The loan amount depends on the institution, fee structure, and the lender's policies, with some lenders like Finnable offering up to Rs. 10 lakhs for MBBS courses.

    Do I need a co-signer or collateral for an education loan for MBBS?

    Requirements vary among lenders. Some, like Finnable, require a co-applicant, which can be the guardian or parent of the applicant, but the need for collateral can differ.

    When do I start repaying my education loan for MBBS?

    Repayment typically begins after the completion of the course. Some lenders, such as Finnable, offer a repayment period extension up to five years after graduation.

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