True Interest Cost (TIC)
Definition of True Interest Cost
True Interest Cost (TIC) is the real cost of taking a loan. True interest cost includes all the subsidiary costs like late fees, discount costs, prepaid interest, and finance charges along with all the other factors that are related to the value of money. It can also be referred to the It can also refer to the real cost of issuing of the bond. The borrowers of the bond are entitled to all the true information about the bond.
By definition, True Interest Cost or TIC is the yearly cost for obtaining debt financing, expressed as proportion of the total debt amount. All the charges that are related to that particular bond like interest payment, installment prices etc and other additional costs that are related with that particular bond during a particular year is to be taken into consideration.
How to measure True Interest Cost
The Annual Percentage Rate or APR helps in the measurement of the True Interest cost. It takes into account everything related with the loans and the lenders are bound by the Truth In Lending Act to make sure that they provide with the appropriate and actual information relating to the load that the lender is providing the borrower with.
Annual Percentage Rate is a rate calculated on the adjustable rates, it takes into consideration the initial interest and calculating the interest cost would be accurate only if you take multiple factors into consideration. The borrowers should make sure that they request two true interest cost calculations from the lender while taking the loan.
Say, if the True Interest cost of a loan is $4000 at 10% interest payable over 36 months is $645, the total cost to the loan would be $4545.00 which would be the True Interest Cost or TIC. True Interest Cost is commonly used in municipal bond offerings, is the rate of interest which is calculated twice in a year, it is compulsory for the lender offering the loans to disclose the payment principal and the rate of interest to the borrower for the original purchase.
So, as per definition true Interest Cost for a security or loan which is sold at a discount price, there is an annual rate of interest that is paid to the owners at the time of purchase, which on maturity of the loan could provide similar returns.