Calculate the real interest rate from the nominal interest rate and expected inflation rate by using the fisher equation. Real interest rates account for inflation.

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## Real Interest Rate Formula

The following formula is used to calculate the real interest rate.

ir = i – e

- Where ir is the real interest rate
- i is the nominal interest rate
- e is the expected rate of inflation.

## Real Interest Rate Definition

A real interest rate is the expected true interest rate of a loan or credit after inflation is taken into account. Since inflation occurs naturally in a healthy economy, you must take it into consideration when determining a real or true interest rate.

## How to calculate real interest rate

Let’s look at an example of applying the formula above. Let say you take out a loan with 7% interest. Next, the expected level of inflation is 2%. Now plug those values into the calculator or equation above, and you have an adjusted real rate of 5%. As you can tell, the real interest rate is lower than the nominal interest rate. As a result, this means that the money you borrowed will be worthless at the end of the year, and so you will actually be paying more.

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