Real Interest Rate

An interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower, and the real yield to the lender. The real interest rate can be calculated as follows:

Real Interest Rate = Nominal Interest Rate - Inflation

For example, if you took out a car loan and the bank asked that you pay an interest of 4% per year, and inflation is currently 3% per year, then the real interest rate you are paying is 1% (4% - 3% = 1%).