Variable Rate Loan

Full form: Floating Rate Loan

Loans & Credit

A variable (floating) rate loan has an interest rate that changes periodically based on a benchmark rate (repo rate, MCLR). All new home and personal loans since October 2019 must be linked to external benchmarks like the repo rate. When RBI cuts rates, floating rate borrowers benefit immediately.

In detail

Variable rate loan mechanics:nBenchmark: Repo rate (6.5% as of 2024)nBank spread: fixed at loan inception (e.g., 2.0%)nCurrent rate: 8.5% = 6.5% + 2.0%nIf RBI cuts by 0.25%: rate becomes 8.25% automatically within 3 monthsnnFloating vs fixed rate:nFloating (current): 8.5%, changes with RBI ratenFixed (rare in India): 9-9.5%, stays constant for lifennWhen to prefer floating: when rates are high and expected to fall (current 2024 scenario)nWhen fixed may be better: when rates are at multi-year lows (unlikely to fall further)nnIndia reality: fixed rate home loans are rarely available and at significant premium. Most home loans are floating rate.

Formula

Variable rate = Benchmark rate + Bank spreadnEMI recalculation: EMI stays same but tenure changes as rate moves (most common bank practice)

Real-life example

🇮🇳 India example

Rajan took Rs 60L home loan in 2019 at MCLR + 0.25% = 8.75%. RBI cut rates in 2019-2020. His MCLR linked loan updated annually -- but slowly. He switched to RLLR in 2021: 8.25%. Then RBI hiked in 2022-23: rate went to 9.5%. Now RBI cutting again: 2024 rate 8.75%. The variable rate journey: 5 years of rate changes required active monitoring and two rate renegotiations.

Frequently asked questions

Should I ask my bank to convert my MCLR loan to repo-linked (RLLR)? ▼

Generally yes if you expect rate cuts. RLLR loans pass RBI cuts faster (quarterly reset vs MCLR annual reset). Conversion cost: Rs 5,000-15,000 one-time fee. If rate cut of 0.25% over next 3 years: monthly saving Rs 500 x 36 months = Rs 18,000 saving vs Rs 10,000 conversion cost. Pays off within 20 months. Usually worthwhile in a rate-cutting cycle.