How Does the Truth in Lending Act Work?
Lenders must provide borrowers with a Truth in Lending disclosure statement. It has handy information like the loan amount, the annual percentage rate (APR), finance charges, late fees, prepayment penalties, payment schedule and the total amount you’ll pay.
The law also established a “right of recession” for certain types of home loans. It’s basically a cooling-off period that gives consumers three days to cancel their loans without any financial penalty.
TILA does not require institutions to loan money to specific applicants or regulate the interest rates they can charge. It just requires banks, credit unions and other lenders to clearly lay out what the terms of the loan will be.
Applying the Truth in Lending Act
The law covers most forms of consumer loans, whether they are closed end or open-end credit. Closed-end loans mean you get a set amount of money when the loan closes and must pay it back (with interest, of course). Think of mortgages or auto loans.
Open-end is money you can draw repeatedly, up to a pre-approved amount. Think of credit cards and lines of credit.
Though TILA does not regulate interest rates, it does prohibit lenders from imposing excessive penalties if a borrower is late making a payment.
These loans are covered under TILA:
These loans are not covered:
Benefits of the Truth in Lending Act
Sir Francis Bacon didn’t have a credit card when he coined the phrase “Knowledge is Power” in 1597, but the English statesmen’s words certainly apply here.
TILA gives consumers knowledge about borrowing and empowers them to deal with lenders. Among the benefits:
- Protection from excessive penalties.
- Transparency in terms and fees associated with loans.
- Consumers can compare loan and credit offers.
- Expanded time to repay loans.
- Protection from predatory lending practices.
- Options to cancel loan contracts within certain time limits.