What is PLR, and how can it impact a home loan?

Buying a house is one of the biggest financial milestones one can achieve in their lives. Naturally, a milestone this big requires financial assistance in the form of a home loan. But the moment you step into the home loan application process, you are hit with a lot of financial jargon. Circle rate, market rate, occupancy certificate, completion certificate and more. Among the many acronyms spoken by the loan officers, there’s one you will often hear: PLR.

If you are new to home buying and trying to understand what a PLR means to your home loan journey, this is the post for you.

PLR stands for Prime Lending Rate, which is an internal benchmark or baseline interest rate that a bank or financial institution uses as a starting point to price its loans. Officially it is the interest rate at which a commercial lender offers its low-risk customers, such as corporate giants and individuals with a great financial profile. For retail borrowers looking to apply for a loan, the PLR serves as the foundational anchor.

Home loan lenders will calculate specific home loan interest rates using a simple formula: Final Home Loan Interest Rate = PLR + Spread (or Margin) The spread is an additional percentage that the lender adds or subtracts based on the risk profile, loan amount and financial stability of the applicant. For instance, if a lender's PLR is 16% and they offer you a floating rate at "PLR minus 7%", your final applicable interest rate will be 9%.

The PLR is quite a popular term used in the finance industry, but its relevance depends on the lender. Non-banking financial companies and housing finance companies use the term widely, and it is often called the retail prime lending rate, or the RPLR. The RPLR is their benchmark to determine the home loan rates. On the other hand, commercial banks have transitioned away from internal benchmarks like PLR and base rate. To ensure transparency, the central bank has guided commercial banks through the Marginal Cost of Funds-based Lending Rate (MCLR) to the current External Benchmark Lending Rate (EBLR), which is directly tied to market indicators like the RBI repo rate. Even so, because NBFCs make up a massive portion of the housing credit market, understanding PLR remains vital for millions of homebuyers.

If your affordable home loan is linked to a lender’s PLR, any changes to this rate will directly affect your finances.

Ripple Effect

When institutions set their own PLR depending on the cost of funds and operational expense, they do not operate in a vacuum. As soon as the central banks alter monetary policies while hiking or cutting the repo rate to control inflation, make the lenders feel the pinch.

PLR Fluctuations

If the applicant opts for a floating-rate home loan EMI, which is linked to a PLR, the interest rate keeps changing over the tenure of the loan. When the PLR goes up, the interest rate goes up, which is adjusted by the lenders by increasing the loan tenure to keep the EMIs the same. In contrast, when the PLR goes down, the interests or the tenure goes down too, which reduces the financial burden on the borrower.

The prime lending rate does not change on fixed schedules. But there are situations where it does.

Discretionary Adjustments

Financial institutions adjust their PLR dynamically based on internal board decisions and changing market conditions. Other factors like their own funding costs and monetary policy revisions by the RBI.

Frequency

The internal benchmark is handled manually by the lenders, which is typically updated only a few times in a year.

Lagging Revisions

The PLR is slowly updated because when the RBI slashes repo rates, banks delay in reducing their PLR.

Your creditworthiness determines the risk premium a lender stacks on top of their baseline rate.

Low Risk (High Credit Score)

If a borrower has a top-tier credit score (typically 750+), the lender views them as low-risk. The added risk premium will be minimal (e.g., PLR + 1%), resulting in an affordable final interest rate.

High Risk (Low Credit Score)

If a borrower has a spotty credit profile, history of defaults, or high debt-to-income ratio, the bank factors in a steep risk premium (e.g., PLR + 3% or higher) to protect their margins, causing EMIs to skyrocket.

Lending below the designated benchmark has been a common practice known as 'sub-PLR lending'. Lenders frequently bypass their standard baseline rate and offer cheaper loans using certain strategies, like:

High Value Standing

Large corporates and high-net-worth individuals with substantial bargaining power have immense bargaining power to negotiate the interest rates well under the PLR.

Exceptional Credit Profile

A pristine credit record and impeccable repayment track eliminate the risk premium for the lender and justify a rate below the standard benchmark.

Existing relationships

Long-term loyalty with the banks or institutions, like possessing a savings or fixed-deposit account, can get you a lower PLR based on the relationship.

Your new home loan is a long-term commitment. When choosing a lender using a PLR system, don't just look at the current interest rate being offered today. Look at the lender’s track record of adjusting their PLR when market conditions change. A clear understanding of PLR empowers you to look past fancy marketing, ask the right questions, and choose a housing finance option that genuinely protects your wallet over the long haul.