Marginal Cost of Funds based Lending Rate otherwise known as MCLR rate is the rate which is approved by the RBI or the rate below which a commercial bank cannot lend loan to its customers. It is actually the internal reference rate for the banks to decide on the lending rate. This rate was implemented by the RBI on 1 April 2016.

After the implementation of MCLR rate, the interest rates will be based on the relative riskiness on individual customers. Earlier, when RBI reduced the repo rate, the banks took their own time to change their lending rates accordingly. Now under MCLR, they have to change it with immediate effect. That is, now the bank is linking their lending rates to the marginal funding costs which are also the cost of fresh or incremental borrowings. So when the bank reduces the rates on FDs, savings account, etc. it should also reduce the lending rates.

It is always ideal to go for the MCLR rate as it is quite advantageous than the base rate. For the new home loan borrowers, the interest rate will be lower than the base rate and whenever there is a change in the interest rate, it will go down further. When you are going for a home loan you have to ensure that it has a clause containing the interest reset period as any change in the interest will only be done at the interest reset period. If you are already in the base rate then you can get it changed to MCLR rate and if your bank does not have that option then you might go for any other lender who has that option. But it is advisable to go for it only when you find any significant benefit in that.