Taking out any loan is a major financial decision.
That’s where the Truth in Lending disclosure comes in. It’s required by the Truth in Lending Act (TILA) and designed to disclose all the costs that come with loans, including personal loans.
By paying special attention to the Truth in Lending disclosure before you commit to a personal loan, you can avoid unwanted surprises and protect yourself financially.
Let’s take a closer look at what a Truth in Lending disclosure is.
What Is the Truth in Lending Act?
The Truth in Lending Act (TILA) is a federal law that was passed in 1968 and is currently enforced by the Federal Trade Commission.
It was created to ensure you have a clear understanding of all of the costs and terms associated with a loan. This type of transparency can protect you from predatory lending while making it easier for you to compare the costs of different loan products.
Before the TILA was enacted, consumers were overwhelmed with all the terms and rates of different loans and had a difficult time comparison shopping.
Since lenders would often overwhelm them with information, a uniform system for revealing terms and rates was essential to help consumers avoid mistakes and make smart borrowing decisions.
What Is Regulation Z?
Regulation Z is essentially another name for the Truth in Lending Act of 1968.
It applies to a variety of products, including installment loans, mortgages, home equity lines of credit, reverse mortgages, credit cards, and private student loans.
Business, commercial, and agricultural loans, federal student loans, and large loans over a certain threshold are exempt from Regulation Z.
Under Regulation Z, lenders must share interest rates, fees, and finance charges with borrowers.
The regulation also requires monthly billing statements, and notifications when a variable interest rate changes.
In addition, it prohibits mortgage lenders from unfair practices that involve a conflict of interest between themselves and brokers.
It’s important to note that Regulation Z doesn’t impose restrictions on loan terms. This means lenders have the freedom to set their own rates and fees.
Also, Regulation Z doesn’t regulate the types of loan lenders can offer and who can apply for them.
What Is a Truth in Lending Disclosure?
One of the requirements of the TILA is a Truth in Lending disclosure statement.
Lenders must provide this statement in clear, simple language so that consumers are fully aware of the cost of a loan.
The disclosure should contain the following components.
Annual percentage rate (APR)
The APR is the loan interest rate and reflects the total cost you’ll pay to take out a loan each year, including your interest rate and any fees.
It’s expressed as a percentage and will give you a complete picture of your overall cost of borrowing.
Note that the APR you’ll find on a disclosure will always exceed the interest rate quoted on your loan.
Finance charge
The finance charge refers to the total amount of interest you’ll pay, plus your origination fee.
You can think of it as your APR expressed as a dollar amount.
Your finance charge is an estimate because if you make an extra payment on your loan or pay it off early, you won’t pay as much interest.
Amount financed
The amount financed is the amount of money you’ll borrow, minus your origination fee.
Let’s say you apply for a $20,000 personal loan and your origination fee is $200.
Your amount financed would be $19,800.
This figure will always be lower than the amount you applied for.
Total payments
Total payments is the total number of loan payments you’ll make if you follow your payment schedule and make the minimum required payments every time.
Keep in mind that this is an estimate because if you make extra payments on your loan or pay it off early, you’ll pay less in interest. You can use an installment loan calculator to see how this can affect the amount of interest you’ll pay.
On the flip side, if you’re late on your payments, you’ll pay more due to extra interest charges and potential late fees.
Payment schedule
The payment schedule is exactly what it sounds like: a schedule that shows when your loan payments would be due.
It includes the dollar amounts owed and the dates on which your payments must be made.
The payment schedule is often used to determine if payments are late.
Credit insurance
Credit insurance can protect the lender from default in the event you lose your job, can’t work due to a disability, or pass away.
If you purchase it, the lender must be clear on how much it will cost and how it will work.
Some lenders will include a separate disclosure that explains all the ins and outs of credit insurance.
Late charges
The late charge disclosure explains how many days after the due date a payment will be considered late.
It also states what you’ll owe in late fees. Late fees are typically a flat rate or a percentage of your total loan balance.
Prepayment charges
The prepayment charge is what you’ll have to pay if you repay your loan early.
While some lenders have prepayment charges, others do not.
If you plan to pay your loan off ahead of schedule, prepayment charges are very important.
You don’t want to repay your loan early and later learn that you owe a hefty penalty.
Benefits of the Truth in Lending disclosure
The Truth in Lending disclosure offers several advantages to you as a borrower.
It can give you more visibility into loan terms and fees.
In addition, it may protect you against predatory lending practices and help you avoid unreasonable penalties.
The disclosure can also provide you with the insight you need to compare loans and credit offers so you can hone in on the ideal products for your unique situation.
Without it, it would be a lot easier for lenders to take advantage of you.
What to Do if a Lender Failed to Provide a Truth in Lending Disclosure
If a lender did not include a Truth in Lending disclosure or you believe they violated the TILA in some other way, reach out to their customer service line. Ask to speak to a manager or supervisor about the issue. You might find that the violation may have been an error or misunderstanding.
In the event the lender does not work with you to resolve the issue, don’t hesitate to file a complaint with the Consumer Financial Protection Bureau and the Federal Trade Commission.
You can also contact a consumer rights lawyer who can examine your situation and explain your options. Just keep in mind that this process may be expensive and time-consuming.
Bottom Line
A loan can help you meet a variety of short-term and long-term financial goals.
Thanks to the TILA and disclosure requirement, you can reduce the risk of working with a shady lender or paying surprise fees.
However, remember that even though lenders must include the disclosure, it’s up to you to read the fine print, understand borrowing costs, and compare products.
A bit of comparison shopping can save you hundreds or even thousands of dollars in the long run.
