Truth in Lending Act (TILA)
What it is:
How it works (Example):
The Truth in Lending Act requires lenders to disclose certain terms to consumers in a standardized manner so consumers have adequate information about the costs of borrowing. The main figure required to be thoroughly disclosed and explained by the TILA is a loan's annual percentage rate (APR).
For example, assume you're considering an adjustable rate mortgage (ARM). TILA requires the APR and total cost of the loan to the borrow to be disclosed in the mortgage contract. Additionally, although it may seem basic, the term of the loan is required to be disclosed in the contract so that the borrower knows how long he will be paying off the loan.
TILA is also applicable to open-end credit like credit cards. The Act limits the information that can be advertised by lending companies to consumers in order to prevent lenders from presenting false information about credit terms. Restrictions against advertising can also be applied to closed-end credit situations like mortgages and loans.
Why it Matters:
The Truth in Lending Act protects the rights of consumers and borrowers. By requiring that lenders disclose specific terms of their loans and not use false or skewed information in the advertisement of their loans and credit card accounts, consumers should have a better idea of what to expect when borrowing and paying off a loan. Therefore, consumers have a b idea of exactly what loans and credit cards they can afford.