The real interest rate measures the true cost of borrowing or the actual yield on an investment after adjusting for inflation. Unlike the nominal rate—which reflects only the stated percentage—the real rate shows how much purchasing power increases (or decreases) over time.
Mathematically, the real rate is approximately equal to the nominal rate minus the inflation rate:
Real Interest Rate ≈ Nominal Rate − Inflation Rate
Example:
If a loan has a nominal rate of 6% and inflation is running at 3%, the real interest rate is roughly 3%.
