MCLR vs Base Rate: Unveiling Differences and Impact

by Godrej Properties Limited



Unlocking the potential of the best home loan interest rates is a crucial concern for many borrowers. To make an informed choice, it is essential to understand the differences between MCLR and base rate. The common perception is that opting for a home loan based on MCLR is generally better than the Base Rate. MCLR offers more transparent and flexible interest rate adjustments, reflecting current market conditions. It benefits borrowers as changes in lending rates are promptly reflected. Base Rate, though used previously, needs more responsiveness and may not be as advantageous.

What Are Base Rate And MCLR?

The base rate and MCLR are two vital benchmarks affecting home loan interest rates.


The Marginal Cost of Fund-Based Lending Rate (MCLR) represents the minimum interest rate financial institutions impose for specific loans. It sets the lower limit for loan interest rates and is firmly defined for borrowers unless specified otherwise by the Reserve Bank of India (RBI).

Base Rate

Before the emergence of the MCLR, the base rate served as the minimum interest rate for loans mandated by the RBI. Functionally akin to MCLR, both act as the lower limit for interest rates that financial institutions can charge borrowers. The goal behind these rates was to establish a transparent monetary lending policy that streamlines interest rate determination by financial institutions.

What Is The Difference Between Base Rate And MCLR?

These are the critical differences between base rate and MCLR: 

Base Rate

  • The basis of the base rate is derived from the average cost of funds.
  • Essential factors for determining the base rate include operating expenses and maintaining the cash reserve ratio.
  • The base rate remains unaffected by changes made to the Repo rate by the RBI.
  • Financial institutions can change the base rate every quarter as per their policies.


  • The basis of the MCLR rate is the marginal cost of funds.
  • The MCLR rate is influenced by deposit rates, repo rates, operating costs, and maintaining the cash reserve ratio.
  • MCLR fluctuates according to the tenure of the loan.
  • Changes in the Repo rate by the RBI directly impact the MCLR.

Conclusion: Finding The Ideal Home Loan Rate

In the battle of Base Rate vs. MCLR, each has its own unique attributes. While the base rate offers stable rates with minimal dependency on market fluctuations, MCLR provides borrowers with more dynamic interest rates that reflect current market conditions. When contemplating a switch from the base rate to MCLR, it is crucial to seek professional advice to make an informed decision based on individual financial circumstances.


Q. What is the primary difference between MCLR and the base rate?

A. The primary difference lies in the basis of their interest rate determinations. The marginal cost of funds influences MCLR, while the base rate depends on the average cost of funds.

Q. Can borrowers switch from the base rate to the MCLR?

A. Though RBI allows base rate borrowers to switch to MCLR, it is advisable to seek guidance from financial advisors before making the switch.

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