True Interest Cost - TIC

If you’ve ever bought a house or condo, you were probably amazed at the stack of papers that had to be signed and all the numbers being thrown around. Your first thought might be, “Do I have enough cash for all the closing costs?” Thanks to the Truth in Lending Act of 1968, lenders must disclose the “true” or total cost of interest for any type of loan. These costs might include mortgage points, interest that has to be prepaid, and fees due to all the various players in a real estate closing. All these charges will be listed out for you in a standard format on a Truth in Lending form before the closing.

Credit card companies also must disclose the true interest cost when they make those “interest free for six months” offers. They have to tell you what the new interest rate will be after the six months are over, as well as charges for late payments, etc. (Watch out for those 25% interest cards if you know you won’t be able to pay the card off each month).

A true interest cost is also used when calculating the interest expense when issuing bonds. Due to inflation, the buying power of a dollar is worth more today than it will be five years from now. So when the town of Tim Buk Tu decides to issue bonds and is considering bids by underwriters who will sell them for the town, they should be looking at the true interest cost of the payments they will need to make to the bond holders. True interest takes into account that inflation lowers the value of a dollar, so they will calculate the total interest expense that includes the time value of money. This should reduce the town’s true interest cost.