True Interest Cost (TIC): Meaning, Transparency, Calculation (2024)

What Is True Interest Cost (TIC)?

True interest cost (TIC) is the real (total or actual) cost of taking out a loan. True interest cost includes all ancillary fees and costs, such as finance charges, possible late fees, discount points, and prepaid interest, along with factors related to the time value of money (TMV).

Because TIC is commonly used in municipal bond offerings, it also may mean the "actual cost" of issuing a bond. Sometimes TIC may refer to a bond's "Canadian interest cost."

What Does True Interest Cost Tell You?

For bonds, true interest cost is defined as the rate of interest necessary to discount the amounts payable on the respective principal and interest payment dates to the purchase price received for the new issue of bonds. Interest is assumed to be compounded semi-annually. TIC computations produce a figure slightly different from the net interest cost (NIC) method because TIC considers the time value of money, while NIC does not.

How to Discern if a Loan Reveals True Interest Cost

With consumer credit and commercial finance, in particular, it is common to see a teaser or promotional rate that offers 0% interest for six months or something to that effect. Ads like this often will contain a small-print clause that says something like: "If you do not pay the principal amount in full before the expiration period, then your interest rate will increase."

Here, the true interest cost of this financing option is impossible to determine upfront.

True Interest Cost and Transparency

The federal Truth in Lending Act (TILA) requires lenders to disclose the TIC to their borrowers and prospective borrowers in a consumer-loan agreement, which prevents lenders from making misleading statements about the real cost of borrowing from them. This cost must be computed by a standard formula that incorporates interest, fees, and other costs.

Consumer advocacy groups have done a lot to increase financial literacy surrounding credit, but savvy marketers can often find creative ways around the fine print when calculating true interest cost.

Calculating True Interest Cost

Depending on the method of financing, true interest cost may be calculated in a number of ways. As a hypothetical example, if the net interest cost on a car loan is $3,000 and is due in 12 months, then the true interest cost would account for the time value of money by discounting that amount to the present. If we assume that the appropriate discount rate is 10%, then the TIC would be as follows:

$\frac{\$3000}{(1\ -\ 0.10)}\ =\ \$3,333.33$(1−0.10)$3000​=$3,333.33