Gold Loan Formula Explained with Examples (India)

If you want to understand exactly what a lender is doing when it quotes your gold loan, you need the underlying formulas. There are really three of them, chained together: one for the value of your gold, one for how much of that value you can borrow, and one for the repayment. This article explains each with clean rupee examples, so the output of any gold loan calculator stops being a black box.

Expert insight: Most disputes at the branch come from step one — the valuation — not the interest maths. If you understand how net weight and karat feed the formula, you will rarely be surprised by the sanctioned amount.

Formula 1: The Gold Valuation Formula

The value the lender assigns to your gold is:

Gold value = Net gold weight (g) × Purity factor × Per-gram 22K rate

Net gold weight is the gross weight minus stones, beads and soldering. The purity factor scales other karats to the 22K benchmark: 22K = 1.00, 20K ≈ 0.909, 18K ≈ 0.818. Indian lenders almost universally price against a 22K reference because that is what ornaments are made of.

Formula 2: The Loan-to-Value Formula

Once the gold value is known, the eligible loan is simply:

Eligible loan = Gold value × LTV

Since 1 April 2026, the RBI LTV is tiered by loan size rather than a flat 75%. For a small loan up to ₹2.5 lakh you can reach 85%; between ₹2.5–5 lakh it is 80%; above ₹5 lakh it is 75%. A subtle point is that the tier is decided by the loan amount, so on the ₹2,77,200 necklace above, 85% would be ₹2,35,620 — but that exceeds ₹2.5 lakh only if you round up, so it stays comfortably in the 85% band and yields about ₹2,35,620.

Formula 3: The Repayment Formula

Here the maths depends on the repayment structure you choose. For an EMI (reducing-balance) loan, the same formula used across our personal loan EMI calculator applies:

EMI = P × r × (1+r)^n / ((1+r)^n – 1)

For a bullet or overdraft-style gold loan, interest is usually simple interest on the outstanding principal:

Interest = P × (annual rate/100) × (months/12)

and you repay P plus that interest at the end. The RBI now caps bullet-repayment tenures at 12 months, so simple-interest gold loans cannot run indefinitely.

Worked Example: EMI Loan

Priya borrows ₹1,50,000 at 10% for 12 months. Monthly rate r = 10/12/100 = 0.008333. Plugging in, EMI ≈ ₹13,187, total repayment ≈ ₹1,58,240, so interest ≈ ₹8,240.

Worked Example: Bullet Loan

Karthik borrows ₹2,00,000 at 12% for 9 months as a bullet loan. Interest = ₹2,00,000 × 0.12 × (9/12) = ₹18,000. He repays ₹2,18,000 at the end. His monthly outgo is zero until maturity, which suits a borrower expecting a lump sum — a crop sale or a bonus.

Putting the Formulas Together

The full chain, from jewellery to monthly payment, looks like this for a typical case:

1. Weigh and test: 40 g of 22K, no stones → net 40 g.
2. Value: 40 × ₹6,600 = ₹2,64,000.
3. Apply LTV: loan just over ₹2.5 lakh, so 80% → ₹2,11,200 eligible.
4. Borrow ₹2,00,000 at 11% for 12 months → EMI ≈ ₹17,672.

Benefits of Knowing the Formula

Understanding the three formulas gives you negotiating power. You can immediately spot if a lender is quietly valuing your gold below the market rate, or applying an old flat LTV instead of the more generous tiered one. You can also decide between EMI and bullet repayment on cost grounds rather than guesswork, and you can forecast your total interest to the rupee before signing. This clarity is especially valuable for small business owners who use gold loans as rotating working capital.

Challenges and Limitations

The formulas are exact, but their inputs are not fully in your control. The per-gram rate changes daily, purity is decided by the lender’s testing machine, and processing fees sit outside the core formula yet still affect your effective cost. NBFCs may also add a spread for smaller towns. So the formula tells you the structure of the deal, while the branch fills in the exact numbers on the day.

Common Mistakes to Avoid

• Applying LTV before deducting stones. Always compute net gold value first, then apply the LTV.
• Using an annual rate as the monthly r. Divide the annual rate by 12 and by 100 before using it in the EMI formula.
• Mixing bullet and EMI logic. Simple interest and reducing-balance interest give very different totals for the same rate.
• Forgetting the tiered LTV. The band is set by loan size, so a large loan is capped at 75%, not 85%.
• Ignoring compounding on overdue amounts. Missed EMIs can attract penal interest that the base formula does not show.
• Rounding the per-gram rate too aggressively. On heavy jewellery, a ₹50 rounding error changes the loan by thousands.

Best Practices and Expert Recommendations

• Calculate all three steps before visiting, so you arrive with a realistic target loan in mind.
• Ask for the reference gold rate the lender is using and compare it with a published benchmark.
• Choose repayment by cash flow: steady salary suits EMI, lumpy income suits bullet.
• Re-run the EMI formula if the lender changes the tenure, since a longer term lowers EMI but raises total interest.
• Confirm all fees and fold them into your effective rate before comparing lenders.
• Keep documentation of the valuation, so you can verify the return weight and purity when you close the loan.

Gold Loan vs Personal Loan: The Numbers Compared

Because a gold loan is secured while a personal loan is not, the formulas produce very different totals for the same borrowing. On a ₹2,00,000 requirement over 12 months, a gold loan at 11% costs far less interest than a typical personal loan at 16–18%, and the gold loan is usually approved the same day without income proof. The table below shows how the same principal behaves under each product, using the reducing-balance formula for both.

The gap widens as tenure and rate rise, which is why families with idle gold often prefer the secured route for short-term needs. Running both scenarios through a calculator before you borrow makes the trade-off obvious and helps you pick the cheaper structure with confidence.

Frequently Asked Questions

What is the gold loan interest formula?

For EMI loans it is the reducing-balance formula EMI = P×r×(1+r)^n / ((1+r)^n–1), where r is the monthly rate. For bullet loans it is simple interest: P × (annual rate/100) × (months/12), paid with the principal at maturity.

How do you calculate the value of gold for a loan?

Multiply the net gold weight (gross weight minus stones and impurities) by a purity factor (22K = 1.0) and by the current 22K per-gram rate. Lenders use this assessed value, not the resale or making-charge value of the jewellery.

What LTV do I use in the formula?

Use the RBI tiered cap effective April 2026: 85% for loans up to ₹2.5 lakh, 80% for ₹2.5–5 lakh and 75% above ₹5 lakh. The tier is chosen by the loan amount, not the gold value.

Is gold loan interest simple or compound?

Bullet and overdraft gold loans usually charge simple interest on the outstanding principal, paid at maturity. EMI gold loans use reducing-balance interest, which is effectively compounded monthly through the amortisation schedule.

How do I find total interest paid?

For an EMI loan, total interest = (EMI × number of months) – principal. For a bullet loan it is simply the simple-interest amount you pay along with the principal at the end of the tenure.