True Interest Cost – TIC Definition

True interest cost (TIC) is the real (or total/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.

It can also refer to the "actual cost" of issuing a bond, or sometimes a bond's "Canadian interest cost."

True interest cost can be calculated in several 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.

For the issuer of 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.

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.

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. TIC is also commonly used in municipal bond offerings.

• True interest cost (TIC) is the real total cost of taking out a loan. 
• TIC is similar to net interest cost (NIC) in that it accounts for fees and charges, but unlike NIC, total interest cost also accounts for the time value of money.
• 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.

As a hypothetical example, if the net interest cost on a car loan is $3000 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%, the TIC would then be as follows:

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