What is the Truth in Lending Act (TILA)?

The Truth in Lending Act (TILA) was implemented to protect consumers when they borrow money. TILA requires the disclosure of certain credit terms so that consumers are not deceived.

How Does the Truth in Lending Act (TILA) Work?

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 Does the Truth in Lending Act (TILA) Matter?

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 an idea of exactly what loans and credit cards they can afford.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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