The Truth about the Truth in Lending Act
By Kat DeLong
When you sign up for a new credit card or buy a house, you are faced with pages and pages of small print – do you really read all of it? The answer is probably “no.” Even though you may not go through the whole stack of paper as you sign here and initial there, some fine print should not get overlooked. Thanks to the Truth in Lending Act (TILA), the loan documents must contain the vital information you need
The TILA Defined
Originally passed by congress in 1968, the TILA is a uniform way for lenders to present the terms of a consumer loan so that borrowers can make informed choices and compare costs equally between lenders. This act covers both “closed ended” loans, such as a car loan or mortgage that you pay back over a specified period of time, and “open ended” loans, such as credit cards.
While the Truth in Lending Act covers necessary information, these five material disclosures must always be included:
- The Annual Percentage Rate (APR). This is the percentage listing of the cost of credit that includes all of the finance charges. This is different from the interest rate that is quoted elsewhere in the documents. When all of the charges are included, a loan with an interest rate of 17% may actually have an APR of 25%.
- Finance Charges. This is the dollar amount that is the cost of the credit over the life of the loan. This amount will include all interest, points and preparation fees.
- Amount Financed. This disclosed amount will take the principal amount of the loan and subtract finance charges. For example, if you finance $200,000 and carry five points ($10,000), the amount financed would be $190,000.
- Schedule of Payments. The schedule will tell you the day the payment is due and the dollar amount due for the life of the loan.
- Total of Payments. The total dollar amount that the loan will cost you as long as the scheduled payments are made on time.
New Provisions for the TILA
Recent changes to the TILA address some discrepancies found in so-called “higher-priced mortgage loans.” These changes strengthened parts of the TILA relating to practices viewed as unfair or deceptive. They offer key protection for borrowers including ending the practice of lending money without considering the borrower’s income or ability to repay the loan and put conditions on prepayment penalties.