What is 'True Interest Cost - TIC'

True interest cost is the real 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.

It can also refer to the actual cost of issuing a bond.

BREAKING DOWN 'True Interest Cost - TIC'

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

Calculating True Interest Cost

In reality, true interest cost can be calculated in many different ways. Different forms or financing or credit will dictate the method used. For instance, for consumer credit, it's common to see a teaser or promotional rate offering 0% interest for six months or something to that effect. This often contains a clause: principal must be paid in full before the time period expires, or a jump in interest charges kicks in. Here, the true interest cost of this financing option cannot be determined up front. This type of scenario can play out for numerous different sorts of transactions, particularly for commercial finance purposes.

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 in calculating true interest cost.

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