How do lenders calculate interest on reducing balance versus flat rate for gold loans?

Lenders use two broad methods — flat rate and reducing balance — and the way interest is computed can change the total cost quite a bit.

Under the flat-rate method, interest is charged on the entire loan amount for the full tenure, regardless of what you’ve already repaid. Say a borrower takes a ₹1 lakh gold loan at a 12% flat rate for one year — the interest works out to about ₹12,000, so the total payable comes close to ₹1.12 lakh. It stays constant because the calculation never factors in reducing principal.

With the reducing balance method, interest applies only to the outstanding balance after every repayment. Each instalment covers part of the principal plus interest on what remains, so the overall interest paid is lower.

Borrowers can check the loan agreement or the lender’s product note to see which method applies — it directly affects the effective rate and as well as the total interest outgo.