Real Interest Rate Calculator

Interest rates can have a large impact on what you are paying back over time. Get a better understanding if you will be paying back more or less than expected by calculating the real interest rate here.

Required Information

Real Interest Rate:

What it is

What is Real Interest Rate?

Create Date: October 17, 2024

Last Modified Date: December 3, 2024

Real interest rate is a metric that aligns an interest rate with the current financial climate rather than just using the nominal rate. This is because it takes into account the inflation rate. There is the possibility of having a negative interest rate if the rate of inflation is greater than the nominal interest rate.

How to Calculate Real Interest Rate?

Real interest rate can be calculated with the following variables:

  1. Nominal interest rate

  2. Rate of inflation
With these values you can now apply them in this formula to calculate the real interest rate:
An image showing the formula for calculating the real interest rate.
Where:
  • RIR = Real Interest Rate

  • NIR = Nominal Interest Rate

  • IR = Inflation Rate

Understanding Your Results

Your result will be a single percentage representing the real interest rate after taking inflation into account. If the result is negative, it means inflation is outpacing the nominal interest rate, which could indicate lower real value returns for investors.

How to Use the Real Interest Rate Tool

Using this tool to calculate the real interest rate is straightforward and fast. The steps involved include:

  1. Enter the nominal interest rate in the first input field.

  2. Enter the current rate of inflation in the second input field.

  3. Click calculate and get the real interest rate instantly.

Example Calculation

Let's say you are interested in checking what the real interest rate would be right now so you can make a decision with your finances. The nominal interest rate is 7% but the rate of inflation is currently 6%.

With this tool we can easily get that value by entering 7 into the nominal interest rate field and then 6 into the inflation rate field. We can hit calculate and get a real interest rate of 1%, opposed to the 7% nominal interest rate that we thought was most accurate.

Real Interest Rate - Frequently Asked Questions

Higher real interest rates are not necessarily good, as this means that borrowing money will be more expensive. For borrowers, lower real interest rates are generally better.

According to Investopedia, when real interest rate is negative, commercial banks are charged interest to keep cash with a nation's central bank rather than receiving interest, which can have a trickle-down effect on the economy.

Yes, real interest rate can indeed be zero if both nominal interest rate and inflation rate are the same. This means that the value of money remains constant, with no effective gain or loss in purchasing power.

Similar Tools

Related Calculators

We have many more calculators that you can use for free. Here are a few similar tools that might interest you.