Why real interest rate matters to a first-time founder
The headline borrowing rate does not show how inflation changes the economic burden of repayment. Comparing nominal and real rates helps founders assess financing, savings and investment returns in purchasing-power terms, especially when inflation is high or volatile.
Examples of real interest rate
A loan charges 8% annually while expected inflation is 3%. The approximate expected real rate is 5%. Using the exact Fisher relationship gives about 4.85%. Actual inflation may differ, so the realised real cost can only be known afterwards.
Common misunderstanding
A real rate is not normally the rate printed in a loan agreement. It is calculated using expected inflation for a forward-looking estimate or actual inflation afterwards. Simply subtracting inflation is an approximation that becomes less accurate at high rates.
When to use it
Use it when comparing loans, savings or investments across periods or countries with different inflation. State whether the rate is expected or realised and identify the inflation measure. Compare like currencies, maturities, risk and tax treatment before deciding.