Demystifying PLR Rates in Home Loan Lending

PLR or Prime Lending Rate refers to the rate of interest at which banks and financial institutions within the country lend money to their most creditworthy or best customers. For commercial lenders across the country, the PLR or the Prime Lending Rate serves as the benchmark rate for all loans, including home loans. The question is how do commercial lenders decide their PLR? Does the Reserve Bank of India play a role here? The answer is no. It is the internal management committee of any bank or financial institution that decides its PLR.

So, how do lenders decide the home loan interest rates to be offered to a borrower? When a borrower applies for a loan, lenders add a spread to the PLR based on the creditworthiness and repayment capacity of the borrower and this becomes their home loan interest rate. Lenders charge a higher spread if the risk involved in doing business with the borrower is high. For instance, if the borrower who has applied for a home loan is already repaying a car loan and a personal loan and has a high debt-to-income ratio along with a mediocre credit score, the lender they apply to will add a hefty spread to the PLR to make up for the risk involved in doing business with the lender. On the other hand, if a highly creditworthy borrower whose credit score is excellent and whose debt-to-income ratio is below 30% applies for a home loan, the lender they apply to will add only a small spread to the PLR and charge a low rate of interest.

Individuals planning to apply for a home loan or individuals repaying a home loan must keep in mind that any changes in the PLR will have a direct impact on their home loan interest rates. Therefore, all home loan borrowers must keep themselves abreast with all the changes. Now, let us look at the factors that affect the PLR.

1. Internal Factors: Lenders decide their PLR after taking into account factors, such as the lender’s cost of funds, risk premium, profit margin, etc. Any changes in any of these factors also compel the lenders to change their PLR to keep their profit margins intact.

2. External Factors: Lenders also take into account external market conditions, such as external market conditions, existing inflation and the monetary policy rates set by the RBI, while deciding their PLR. Any changes in any of these external market conditions that affect the PLR also cause the PLR to change.

3. Base Rate: The base rate is the minimum home loan interest rate that lenders can charge while lending money to borrowers. All financial institutions have the freedom to decide their base rate. However, the base rate can never be lower than the lowest possible interest rate prescribed by the Reserve Bank of India. Any changes in the Base Rate also have a direct impact on the PLR rates and therefore, home loan interest rates.

4. Borrower’s Credit Profile: Lastly, a borrower’s credit profile also has a direct impact on the prime lending rate. Borrowers who do not pose a high risk to their lender get offered loans at low PLR whereas high-risk borrowers are asked to pay a high PLR on their loans.

Individuals applying for a loan or repaying a loan must keep themselves informed about changes in PLR as any changes in PLR directly affect a person’s loan interest rates and therefore, the total cost of borrowing the loan.