Truth in Lending Disclosure Statements
The Truth in Lending Act of 1968 (TILA) is a piece of federal legislation designed to provide more transparency for consumers who use credit, including credit cards, making it easier for the average consumer to compare loans before choosing. Among other provisions, the law requires disclosure about the actual cost of a consumer credit transaction by providing the terms of a loan, interest rates, due dates, and other relevant information in plain language.
Since financial products are often quite confusing for people without a finance background, this disclosure allows average consumers to be more savvy when shopping for a loan.
TILA originally was Title I of the Consumer Credit Protection Act, which created a set of regulations known as "Regulation Z" (so a reference to "Regulation Z" is merely a reference to TILA). The rule making authority for TILA was transferred to the Consumer Financial Protection Bureau in 2011.
What Does a Truth in Lending Disclosure Look Like?
Consumers who may not otherwise be familiar with TILA may recognize the sample Truth in Lending Disclosure Statement below. These statements are required by law to be included with any loan or credit offering before you sign on the dotted line:
Annual Percentage Rate
The cost of your credit as a yearly rate.
The dollar amount the credit will cost you.
The amount of credit provided to you on your behalf.
Total of Payments
The amount you will have paid after you have made all payments as scheduled.
TILA disclosures are typically more detailed, but the sample provided above highlights the most useful information for comparison shopping. Other information disclosed in the statement includes the number of payments required, filing fees, late charges, whether the loan has a variable rate, and whether or not you will incur a penalty if you pay off your balance early.
How are the Four Main Components of the Disclosure Defined?
- Annual Percentage Rate: The APR refers to the interest rate for an entire year (or "annualized"), as opposed to just the monthly rate; generally speaking, this is the cost of your credit expressed as a yearly rate,
- Finance Charge: The finance charge is the sum of all charges payable by the debtor, including monthly fees and a percentage of the balance carried forward.
- Amount Financed: This is the amount of credit provided by the creditor; for example, the amount financed for a $5,000 loan is $5,000.
- Total of Payments: This is the sum total of all payments you will have made by the time you have paid off your balance, including all fees and finance charges.
See the Federal Deposit Insurance Corporation's (FDIC) Website for the complete text of the Truth in Lending Act [PDF].