What is Prime Lending Rate in home loan?April 3, 2023 . Home loans . 10 min read
Home loans are a popular way for people to purchase their dream home without putting a significant financial burden on themselves. However, understanding the intricacies of a home loan can be daunting, particularly when it comes to the Prime Lending Rate (PLR). The PLR plays a critical role in determining the interest rate on a home loan, and as a borrower, it is essential to have a good understanding of it.
In this blog, we will delve into what the Prime Lending Rate is, how it affects home loan interest rates, and what factors influence it.
It is the interest rate that is used as a benchmark by commercial banks when charging loans to their most creditworthy clients. It was introduced by the Reserve Bank of India in 2003 as a reference rate for commercial banks to determine lending rates. The PLR is determined by individual banks based on various factors such as their cost of funds, market conditions, and the borrower’s creditworthiness. The rate is decided by the bank’s board of directors after careful consideration and is subject to periodic revisions based on changes in economic and market conditions.
The PLR is closely linked to the central bank’s policy rates, such as the Repo Rate in India, which is the lending rate of the central bank for commercial banks. Changes in the central bank’s policy rates often lead to corresponding changes in the PLR, which in turn affects the interest rates that borrowers pay on various loans. The PLR plays a critical role in the banking system and has a significant impact on the overall economy, as it affects the cost of borrowing for businesses and individuals.
It plays a crucial role in determining the interest rate that lenders charge on home loans. When there is a rise in the PLR, there is also an increase in the rate of interest on home loans; this results in the borrower having to make more payments each month. Conversely, when the PLR decreases, the interest rate on home loans decreases, which lowers the borrower’s monthly payments. Therefore, it’s essential to keep track of the PLR movement to understand the potential impact on home loan interest rates.
In addition to the PLR, lenders also assess the borrower’s creditworthiness before deciding on the final interest rate to be offered on a home loan. This is done by checking the borrower’s credit report, including their credit score. If the credit report is good, with a credit score above 750, the borrower is likely to receive the lowest rate that the lender must offer. However, if the lender considers the borrower a credit risk due to an unreliable credit score or a history of bad repayment behaviour, the borrower may receive the loan on unfavourable terms and conditions, even if the PLR is low.
The Prime Lending Rate and Variable Interest Rates are two concepts that are often confused with each other. While both are crucial for those with variable interest rate debt, there are some significant differences between the two.
The Prime Lending Rate refers to the interest rate that a lender offers to its best customers On the other hand, variable interest rates are the interest rates that lenders charge on debt with variable interest rates, such as credit cards, variable-rate mortgages, personal loans, etc.
It is decided by the lender’s internal board and remains the same across all branches of the lender throughout the country. However, variable interest rates fluctuate based on changes in the market and the lender’s decision to adjust the rate.
If the Prime Lending Rate rises, it affects the variable interest rate on debt as the lender may charge a higher interest rate, resulting in an increase in the monthly payment on the variable debt. Similarly, if it decreases, the borrower may see a reduction in their monthly payment on a variable debt.
When lenders decide their Prime Lending Rate, they take into account various factors. These factors are crucial for determining the interest rate that borrowers will have to pay on their loans. The key factors that affect it include:
Lenders take various internal factors into consideration before setting the Prime Lending Rate. Some of these factors include the lender’s cost of funds, administrative expenses, risk premium, and desired profit margin. Any change in these factors can result in a change in the Prime Lending Rate.
Lenders also take external factors into account while deciding on the Prime Lending Rate. These factors include prevailing market conditions, inflation rate, economic growth, and the monetary policy set by the Reserve Bank of India (RBI). Changes in any of these external factors can impact the Prime Lending Rate.
It is the minimum interest rate at which a lender can lend money. Lenders have the freedom to decide their Base Rate, but it cannot be lower than the rate prescribed by the RBI. Any change in the Base Rate directly impacts the Prime Lending Rate.
Lenders also consider the creditworthiness of a borrower before offering them a home loan. A borrower’s credit score, credit history, income, and employment status can all influence the Prime Lending Rate offered to them. Borrowers with a good credit profile may be offered a lower PLR compared to those with a poor credit history.
Understanding the Prime Lending Rate and how it impacts your home loan interest rate is crucial for any borrower. Keeping an eye on changes in the PLR can help you make wise decisions when it comes to your home loan repayments. Moreover, if you are a first-time homebuyer struggling with arranging for the down payment and other property-related payments, HomeCapital can be your solution.
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