When you take a gold loan, you pay interest on the amount you borrow. The interest you pay depends on the loan amount, the gold loan interest rate, and the loan tenure. Your repayment method can also affect how the interest is calculated.
Knowing how to calculate gold loan interest can help you estimate how much you will need to repay. You can use a simple formula to calculate the interest for a basic simple-interest loan.
What Is Gold Loan Interest?
Gold loan interest is the amount you pay the lender for borrowing money against your gold. Before we discuss how gold loan interest is calculated, here are the three main factors that affect your gold loan interest.
- Loan amount: Also known as the principal, it is the amount you borrow by pledging your gold.
- Interest rate: The percentage charged on the loan, usually paid annually. It can be fixed or floating.
- Loan tenure: The duration for which you keep the loan.
A fixed interest rate stays the same throughout your entire loan tenure. However, a floating interest rate changes as per market benchmarks. Any fluctuations in those benchmarks also affect your interest rate.
How to Calculate Gold Loan Interest Rate?
Most banks use a simple gold loan interest formula.
Interest = (Principal × Interest Rate × Time) / 100
Gold Loan Interest Calculation Example
| Parameter | Value |
|---|---|
| Principal | ₹1,00,000 |
| Interest Rate | 12% per annum |
| Tenure | 18 Months |
Before calculating the interest rate, we need to convert the monthly duration to an annual tenure. So 18 months here will become 1.5 years (18/12).
Now, using the gold loan calculation formula, your interest amount would be:
Interest = (₹1,00,000 × 12 × 1.5) / 100
= (₹18,00,000) / 100
= ₹18,000
So, after 18 months, the amount you have to repay becomes ₹1,18,000. For faster calculations, you can use an online gold loan calculator to get results based on your loan terms.
Also note that this is a simple formula used to illustrate a commonly used gold loan interest calculation. However, the actual amount you pay to a lender can vary depending on the lender, repayment method and other applicable charges.
How Is Gold Loan Interest Calculated for Different Repayment Methods?
How you repay your gold loan can affect when you pay interest and how the outstanding loan amount changes. Here are the common repayment methods:
- EMI interest payments: You pay the interest at regular intervals during the loan tenure and the original loan amount at the end. Since the principal does not reduce during the tenure, interest is calculated on the original loan amount.
- Principal and interest EMI: You pay a fixed monthly amount that includes both principal and interest. As you repay part of the principal, the outstanding loan amount reduces. Interest is then calculated on the remaining amount.
- Bullet repayment: You pay the entire principal and accumulated interest at the end of the loan tenure. Since you do not reduce the principal during the tenure, interest can continue to accrue on the original loan amount until repayment.
- Partial repayment or early closure: Depending on the lender's terms, you may be able to repay part or all of the loan before the scheduled end date. A partial payment can reduce the outstanding principal, which may reduce the interest charged on the remaining amount. If you close the loan early, you may also avoid interest that would otherwise apply for the remaining period, subject to the lender's terms.
How to Calculate the Total Amount Repayable
The total amount you repay on a gold loan is not limited to the principal and interest. You may also have to pay other charges depending on the lender and the loan scheme. That is why your total amount repayable is calculated like this:
Total Repayment = Principal + Interest + Applicable Charges
The applicable charges in this case may include:
- Processing fee: This fee is charged to process and disburse the loan. The lender can levy it as a fixed amount or a percentage of the loan amount.
- Valuation charges: Some lenders may charge a fee for assessing the purity, weight and value of the gold pledged.
- Late payment or penal charges: If you do not pay the required amount by the due date, you may have to pay additional charges or a late fee.
- Foreclosure or prepayment charges: Some loan schemes may charge a fee if you repay the loan before the agreed tenure.
- Auction-related charges: If you fail to repay your loan and the pledged gold has to be auctioned, some lenders may charge you for auction-related expenses.
These charges are separate from the interest charged on the loan. The type and amount of charges can vary based on the lender, loan scheme and repayment terms, so carefully check the applicable charges before taking the loan.
If you need a gold loan, Manappuram Finance offers affordable gold loans against 18K to 24K gold. Based on your eligibility, you can get a loan for up to ₹5 crores*.