To provide greater clarity in the lending process and to protect consumers from predatory lenders, the Truth in Lending Act (TILA) was created in 1968. Understanding a few key details about this legislation can help you better handle your loan details so you can make educated borrowing decisions. Here's what you need to know about Truth in Lending and how it relates to ordinary consumers like you.
Like most things in life, credit has a cost. Consumers need to understand those costs when taking out loans. Not only do consumers need to understand the costs to them when repaying the loans, but also the potential consequences of failing to repay the loans as agreed upon when accepting the loan.
Disclosure Requirements
According to the Truth in Lending Act, certain information must be revealed to consumers in a Truth in Lending statement. These disclosures involve essential details about your loan, including those listed below.
- Annual percentage rate (APR)
- Finance charges
- Application fees
- Late charges
- Prepayment penalties
- Payment schedules
- Total repayment over the life of the loan
With these details, consumers have a clearer understanding of what they agree to when they accept a loan. The reason these disclosures are required goes beyond helping consumers make informed choices when borrowing money. It also requires more ethical practices from lenders while creating a more standardized approach for lending from one industry and/or lender to the next.
However, be aware that TILA protections and requirements only extend to consumer lending and credit and do not offer any protection to businesses that take out loans or borrow money.
Annual Percentage Rate (APR)
The annual percentage rate, or APR, refers to the yearly rate consumers pay for a loan. It is an essential tool to inform consumers about how much they pay in interest on their loans each year. This information must be provided to borrowers before signing a loan agreement. However, the APR may not give the actual cost of borrowing because TILA does allow lenders some latitude when calculating APR. While the APR provides a roadmap for how much you can expect to pay for your loan, it may not be the precise monthly payment amount.
Finance Charges
Some refer to the finance charges disclosures in TILA as a dollar amount representing the cost of consumer credit. It's an apt description as it relates to the total interest and loan charges consumers are expected to pay throughout the life of their loan. Of course, the finance charges included in TILA disclosures assume a few key elements.
- Consumers do not accrue late fees throughout the loan.
- That consumers do not refinance the loan for different interest rates or terms.
- No payments are missed or skipped during the loan terms.
- That you do not make early payments that would affect the total interest you pay on your loan.
If you continue paying, as agreed in the original loan terms, for the life of your loan, the finance charges listed in your disclosures should be what you ultimately pay.
Other Disclosures
Other disclosures included in TILA requirements are for consumers' information as much as they are to ensure that consumers aren't hit with a few ugly surprises along the way. These include things like application fees, late charges, and prepayment penalties. While once a common practice, few modern loans offer prepayment penalties. Consumers have caught on to the problems these can create when homes are paid off by insurance claims and when consumers seek to reduce or reorganize their debt. If prepayment penalties exist, you want to know about them beforehand to plan accordingly. All other fees are reasonable to know about, so you can budget for them if the need arises.
Enforcement
The Federal Trade Commission (FTC) enforces the Truth in Lending Act. Lenders who fail to comply with TILA face harsh penalties, including disassociating the loan with assets used to secure the loan. For instance, noncompliance with TILA could render the loan unsecured, meaning the home is no longer collateral to secure the loan. This is in addition to penalties and civil liability fees between $100 and $1,000. There are also civil damages that may be awarded for violations as well as criminal damages.
Exceptions
Some loans are exempt from TILA oversight and regulations. These include business and commercial loans, agricultural loans, federal student loans, and loans that exceed a specific threshold amount.
The Truth in Lending Act is critical for helping consumers understand what they are diving into when accepting a loan. Read through the disclosures carefully and take the time to get all your questions answered before agreeing to any loan terms and receiving funds. After all, this act exists for your protection, and taking advantage of the protection it provides is in your best interest.