True Interest Cost (TIC)

What Is True Interest Cost (TIC)?

True interest cost (TIC) is the real (total or actual) cost of applying for a new line of credit. True interest cost incorporates every ancillary expense and costs, for example, finance charges, conceivable late fees, discount points, and prepaid interest, alongside factors related to the time value of money (TMV).

Since TIC is commonly utilized in municipal bond offerings, it likewise may mean the "actual cost" of issuing a bond. Once in a while TIC might allude 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 important to discount the amounts payable on the individual principal and interest payment dates to the purchase price received for the new issue of bonds. Interest is assumed to be accumulated semi-yearly. TIC calculations produce a figure somewhat not the same as the net interest cost (NIC) method since TIC considers the time value of money, while NIC doesn't.

Step by step instructions to Discern in the event that a Loan Reveals True Interest Cost

With consumer credit and commercial finance, in particular, seeing a teaser or promotional rate that offers 0% interest for a considerable length of time or something like that is common. Ads like this frequently will contain a little print clause that offers something like: "In the event that you don't 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 difficult to decide upfront.

True Interest Cost and Transparency

The federal Truth in Lending Act (TILA) expects lenders to unveil the TIC to their borrowers and prospective borrowers in a consumer-loan agreement, which keeps lenders from offering deluding expressions about the real cost of borrowing from them. This cost must be registered by a standard formula that incorporates interest, fees, and different costs.

Consumer advocacy bunches have done a ton to increase financial literacy encompassing credit, however insightful advertisers can frequently find creative strategies for getting around the fine print while computing true interest cost.

Ascertaining True Interest Cost

Contingent upon the method of financing, true interest cost might be calculated in a number of ways. As a hypothetical model, assuming the net interest cost on a vehicle 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. In the event that we expect that the proper discount rate is 10%, the TIC would be as per the following:
$\frac{$3000}{(1\ -\ 0.10)}\ =\ $3,333.33$

Features

• TIC is like net interest cost (NIC) in that it accounts for fees and charges; however dissimilar to NIC, total interest cost additionally accounts for the time value of money (TVM).
• The federal Truth in Lending Act expects lenders to unveil the true cost of credit to their borrowers and prospective borrowers in a consumer-loan agreement.
• True interest cost (TIC) is the real total cost of applying for a line of credit.