PLR(Prime Lending Rate) is the rate at which commercial lenders lend money to their best customers. Commercial banks have the liberty to decide their Prime Lending Rate. The process involves getting a sanction from all the board members. The Reserve Bank of India introduced the concept of the Prime Lending Rate in 2003. Prime Lending Rate is directly connected with the Repo Rate, which in turn, is the rate at which the Reserve Bank of India loans money to commercial banks.
Prime Lending Rate in Home Loan
If you are planning to avail of a Home Loan, you must familiarise yourself with the concept of prime lending rate because the PLR will directly affect the interest you pay on your Home Loan. Lenders loan out money to customers and compensate for the risk involved in lending this money by charging interest on the loan amount. The Prime Lending Rate directly affects the interest rate that lenders charge on any type of loan, including Home Loans. When the prime lending rate goes up, customers must pay more interest. On the other hand, when the prime lending rate goes down, customers save on their total interest outgo.
If you are planning to avail of a Home Loan, you must also know that your chosen lender will decide the final interest rate to be offered to you by assessing how big a credit risk you are and they will do this by checking your credit report. If your credit report is good and your CIBIL score is above 750, you will get the lowest rate that the lender must offer. However, if the lender thinks you are a credit risk, primarily because of an unreliable CIBIL score and bad repayment behaviour in the past, you will get a loan on unfavourable terms and conditions.
Factors Affect Prime Lending Rate?
- Now that we know what PLR rate is, let us try to understand how lenders decide their Prime Lending Rate. Lenders decide the prime lending rate, i.e. the interest rate they wish to offer to their best customers through an internal board meeting. It is the board that decides the final Prime Lending Rate. Once the board has decided on the prime lending rate, it remains the same at all branches of the lender throughout the country.
- Based on their Prime Lending Rate, lenders also decide their Home Loan interest rates. The interest rate that a lender charges on a loan is the sum of the prime lending rate and spread. Borrowers should know that the spread could either be negative or positive and once decided, it stays the same through the tenor of the loan.
- Borrowers must also know that any changes in the Prime Lending Rate affect only those loans that had been availed of on floating interest rates. Changes in Prime Lending Rate do not affect the interest charged on loans taken out at a fixed rate of interest.
- The Reserve Bank of India introduced the concept of the Prime Lending Rate in 2003. However, there were transparency issues involved with this concept. Ideally, lenders should have never lent money at interest rates below the Prime Lending Rate but they started doing so. This compelled the Reserve bank of India to come up with the concept of Base Rate. The base rate is the lowest interest rate at which commercial banks and lenders can loan money to borrowers. Lenders have the liberty to decide their base rate but they are not allowed to loan money at an interest rate lower than the base rate.
- Those planning to avail of a Home Loan as well as those who are paying off a Home Loan must have a good understanding of both the Prime Lending Rate as well as the Base Rate as these rates indirectly decide the interest rate a borrower pays on their Home Loan.
- If you are planning to take a Home Loan, try to get yourself the lowest Home Loan interest rate deal possible. Home Loans are big-ticket loans with a long tenor. Hence, even a slight reduction in the final interest rate offered can lead to a borrower saving a considerable amount of money in the long run.
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