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Summary<\/em><\/strong><\/p>\n\n\n\n RLLR is a loan interest rate system where floating-rate loans are linked directly to the RBI\u2019s repo rate. It helps banks pass on repo rate changes to borrowers more quickly compared to older systems like MCLR and PLR. As a result, <\/em>home loan EMIs<\/em><\/a> and borrowing costs may change more quickly during rising or falling interest-rate cycles. While the system offers better transparency and quicker rate transmission, it can also lead to more frequent interest rate fluctuations. Borrowers should compare loan terms, reset periods, and long-term repayment impact before choosing an RLLR-based loan.<\/em><\/strong><\/p>\n\n\n\n The Repo-Linked Lending Rate (RLLR) is a benchmark interest rate system where floating-rate loans<\/a> are linked directly to the RBI\u2019s repo rate.<\/p>\n\n\n\n If you have ever taken a home loan<\/a> or any other floating-interest loan, you may have noticed that the interest rate sometimes changes during the repayment period. Have you ever wondered why this happens? In most cases, it is because floating-rate loans today are linked to an external benchmark known as the repo rate. Whenever the repo rate changes, the interest rate on your loan may increase or decrease.<\/p>\n\n\n\n This takes us to a concept called repo-linked lending rate (RLLR). The Reserve Bank of India (RBI) introduced it in 2019 to make loan interest rates<\/a> more transparent and ensure faster transmission of policy rate changes to borrowers.<\/p>\n\n\n\n This blog explains what RLLR is in detail, while also covering its benefits, potential drawbacks, and how RLLR differs from older benchmark interest rate systems, such as MCLR and PLR. Keep reading.<\/p>\n\n\n\n As mentioned, RLLR stands for repo-linked lending rate. Simply put, it is a benchmark interest rate system wherein banks and financial institutions<\/a> are required to link floating-rate loans directly to the RBI\u2019s repo rate. The repo rate is the interest rate at which commercial banks in India borrow money from the RBI.<\/p>\n\n\n\n When the RBI increases or reduces the repo rate<\/a>, the applicable interest rates on floating-rate loans also change accordingly. For example, if the RBI reduces the repo rate, banks also lower their loan interest rates. This, in turn, helps in reducing the loan EMI or tenure for borrowers. Similarly, an increase in the repo rate may escalate the overall borrowing costs.<\/p>\n\n\n\n Before the RLLR system was introduced, banks primarily relied on internal benchmark systems to determine loan interest rates. Examples of such systems include the Prime Lending Rate (PLR), base rate, and Marginal Cost of Funds-Based Lending Rate (MCLR).<\/p>\n\n\n\n Most banks and financial institutions these days use the RLLR system to determine home loan interest rates<\/a>. They add a fixed spread or margin to the repo rate to calculate the final lending rate. This spread may depend on factors such as the borrower\u2019s credit score<\/a>, loan amount, repayment history, and lender policy.<\/p>\n\n\n\n When the RBI\u2019s repo rate changes, the interest rate on an RLLR-based home loan<\/a> also changes accordingly. For example, if the current home loan interest rate is 8.75% and the RBI reduces the repo rate by 0.25%, the new home loan interest rate would be 8.5%. The banks revise the loan interest rate after a fixed reset period, such as every three months.<\/p>\n\n\n\n A change in interest rate can directly impact the borrower\u2019s EMI or loan tenure<\/a>. If the applicable interest rate is reduced, the EMI or loan tenure also reduces, and vice versa.<\/p>\n\n\n\n The RBI introduced the RLLR system in October 2019. Earlier, banks relied on the MCLR system to calculate and revise interest rates for floating-rate loans. Now, borrowers have an option to switch from MCLR to RLLR<\/a>. Doing so offers the following benefits:<\/p>\n\n\n\n Here\u2019s how RLLR and MCLR systems differ based on certain key aspects:<\/p>\n\n\n\n The RLLR system offers several advantages to borrowers. Firstly, the interest rates for floating-rate loans are now directly linked to the RBI\u2019s repo rate. It means changes in the repo rate can quickly affect the loan interest rate, EMI, tenure, and the overall borrowing cost. Borrowers won\u2019t have to wait for longer reset cycles to enjoy rate cuts.<\/p>\n\n\n\n Secondly, in the current economic environment, repo rates have fluctuated frequently due to inflation and changes in the RBI\u2019s monetary policy. In such a scenario, the RLLR system provides greater transparency and enables borrowers to plan their finances more efficiently.<\/p>\n\n\n\n While the RLLR system offers numerous advantages, it has some downsides as well:<\/p>\n\n\n\n Most banks reset their RLLR loan interest rates every three months. Frequent changes to the repo rate can lead to frequent EMI changes, which can make financial planning a bit difficult.<\/p>\n\n\n\n When rates change too frequently, it may become difficult to predict your overall borrowing cost. It also becomes difficult to compare loan options from several lenders.<\/p>\n\n\n\n If the RBI decides to increase the repo rate instead of reducing it, you may end up paying a higher interest amount on your loan.<\/p>\n\n\n\n If you took your home loan before the introduction of the RLLR, i.e., October 2019, your lender may still be following the MCLR system. However, you can always request your lender to switch to the RLLR system. But the question is, is it beneficial to do so?<\/p>\n\n\n\n Remember that since RLLR-based loans respond more quickly to RBI repo rate changes, the impact on EMIs and borrowing costs may also become more frequent. Furthermore, you must compare your bank’s current RLLR with your existing home loan interest rate. Also, check the conversion charges, the remaining loan tenure, and the overall long-term savings. Apply for the switch only if the potential savings exceed the conversion cost and you are comfortable with frequent interest rate changes.<\/p>\n\n\n\n Banks calculate the RLLR rate using a simple mathematical formula:<\/p>\n\n\n\n Here, the repo rate is the rate at which the RBI lends money to commercial banks. Whenever the RBI changes the repo rate, banks also revise the interest rates applicable to RLLR-linked loans.<\/p>\n\n\n\n The spread is an additional percentage that the bank adds to the repo rate to cover its operational costs and profit margin. Different banks may have different spread values for different types of loans.<\/p>\n\n\n\n For example, suppose the current repo rate is 4.5%, and a bank is adding a 4% spread for home loans. In that case, the final repo-linked lending rate would be 4.5% + 4%, i.e., 8.5% per annum.<\/p>\n\n\n\n The applicable repo-linked lending rate directly impacts your floating-rate loan EMIs. Whenever the RBI increases or decreases the repo rate, the change is reflected in your loan interest rate after the applicable reset period. This, in turn, impacts your EMI amount.<\/p>\n\n\n\n For example, suppose you have taken a home loan of Rs. 40 lakhs<\/a> for 20 years. The current interest rate on your loan is 8.5% per annum. Your monthly home loan EMI would be Rs. 34,713. The total interest you would be paying after 20 years amounts to Rs. 43,31,103.<\/p>\n\n\n\nWhat is RLLR?<\/strong><\/h2>\n\n\n\n
How does an RLLR-based home loan work?<\/strong><\/h2>\n\n\n\n
Why consider switching from MCLR to RLLR?<\/strong><\/h2>\n\n\n\n
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RLLR vs MCLR: Key differences<\/strong><\/h2>\n\n\n\n
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Why does RLLR matter for borrowers?<\/strong><\/h2>\n\n\n\n
What are the potential downsides of RLLR?<\/strong><\/h2>\n\n\n\n
<\/a>\u25cf Frequent EMI changes<\/strong>:<\/h3>\n\n\n\n
<\/a>\u25cf Rate volatility:<\/strong><\/h3>\n\n\n\n
<\/a>\u25cf Higher interest rate<\/strong>:<\/h3>\n\n\n\n
Should you switch your home loan to RLLR?<\/strong><\/h2>\n\n\n\n
How is the RLLR calculated?<\/strong><\/h2>\n\n\n\n
RLLR rate = Repo rate + Spread<\/p>\n\n\n\nWhat is the impact of RLLR on your loan EMI?<\/strong><\/h2>\n\n\n\n