What is the Truth in Lending Act?

The Truth in Lending Act helps consumers safely and knowledgeably shop for credit cards and loans.

Shopping for a home loan or a new credit card can mean sifting through a mountain of complex rates and fees. Overlook a simple number and you could end up paying a lot more for financing than you expect. Fortunately, we have the Truth in Lending Act to help us steer clear of such expensive mistakes.

• What is the Truth in Lending Act?
• History
• How does the TILA affect me?
• How can I take advantage of the TILA?

What is the Truth in Lending Act?

The Truth in Lending Act, or TILA, aims to ensure that you receive a clear and understandable layout of certain costs and terms. The TILA also allows you to easily compare financing costs among different products because it requires lenders to lay out certain terms in a uniform way. The point of the law is to make the risks and costs of borrowing transparent, and to protect you from predatory lending.

History

Before the Truth in Lending Act, consumers were often overwhelmed by the various terms and rates, which made it difficult to compare loans. It was not unusual for lenders to provide so much information, in so many different formats, that borrowers would become confused.

The Truth in Lending Act, originally enacted under the Consumer Credit Protection Act, helped solve that problem. The TILA, which went into effect on July 1, 1969, and has been amended several times since, regulates certain aspects of lending and requires lenders to use a uniform system for disclosing certain terms and rates.

How does the TILA affect me?

Disclosures

The TILA generally forbids lenders and creditors from being deceptive about mortgage lending practices, credit cards, auto loans, home equity loans and some other types of credit and loans. Generally, TILA requires creditors to disclose certain information — things like APR, term of loan and total cost to borrower — in a visible, noticeable way.

An annual percentage rate, also known as APR, for a loan is the total interest you’ll be charged for borrowing money, and can include fees, over the course of a full year. For a credit card, the APR is the same as the annual interest rate, but doesn’t include fees.

For credit card terms and conditions, you can find certain information in a table called the Schumer box as part of your card’s agreement. For loans, it can be included in your contract. If your creditor fails to provide you with these disclosures, they can be held liable for any financial harm you may suffer as a result.

Protections

TILA was created to enhance overall consumer protection by preventing lenders from using predatory tactics.

One of the ways the TILA does that is by limiting the changes a lender can make to your loan or credit terms after you’re approved. For example, the TILA requires creditors to give you 45 days’ advance notice before increasing certain credit card fees.

The TILA also helps protect vulnerable borrowers, like older homeowners who can be a target for home equity loan scams, by limiting lenders from demanding things like ending a loan early and accelerating balance payments on home equity loans.

How can I take advantage of the TILA?

In addition to imposing regulations on lenders, the TILA empowers you in a number of ways.

Back out of a bad deal

For certain loans (e.g. HELOCs) covered by the TILA, you have three days to back out of a signed contract without losing any money. This is known as the right of rescission.

Your three-day period starts once you sign your contract and receive your TILA disclosures and right-to-cancel notice. During that time you can review all of your loan costs to make sure you understand what you’re being offered, and you can ask your lender any questions.

Despite any pressure you may feel from a lender, you have the full right to change your mind during this period. If you ultimately decide not to accept an offer, any upfront costs you paid must be returned to you.

Keep in mind that not all loans are subject to the right of rescission — so do your homework first!

Shop for better rates

One of the main goals of the TILA is to give you a chance to comparison shop. Whether you’re looking for a new credit card or you’ve signed a contract for a home equity loan, shopping around before you finalize your decision is the best way to get the right deal for you.

Make sure you read all available disclosures so you understand each fee and know how your rates will be calculated. It’s not only important that you thoroughly review rates and terms, but that you use this information to compare one offer to the next.

Does applying for multiple loans hurt my credit?

When you apply for an auto loan or mortgage, you’ll likely have a hard inquiry appear on your credit reports. While hard inquiries can cause your credit scores to drop, the impact for each individual inquiry is minimal.

To keep multiple applications from adding up and taking a big toll on your credit, take advantage of any “rate shopping” window. Depending on the loan product, that’s a 14- to 45-day period in which all inquiries for that particular type of loan will only count as one inquiry on your credit reports.

Bottom line

The Truth in Lending Act gives you a chance to understand ahead of time where every penny of your money will go throughout the course of your debt repayment.

You can take full advantage of the Truth in Lending Act by taking the time to read all disclosures carefully and by comparing terms among multiple loans or credit cards. Remember, you also have the opportunity to ask your lender questions and, if you want, to attempt to negotiate better fees and terms. That way you have a chance to find the best product available for you.