What Is the Truth in Lending Act (TILA)?

Before taking out any kind of credit, consumers should look carefully at the terms and compare their options. However, many people aren’t sure what to look for in the fine print. If you’re not clear on how credit works, you could be easily convinced to take on credit card debt or loans that aren’t in your best interests.

The Truth in Lending Act (TILA) is a law created in response to that problem. What is TILA, and why should you care about it as a consumer? We’ll take a closer look.

What is Truth in Lending Act?

The Truth in Lending Act was passed in 1968 to curb predatory lending practices and protect the rights of consumers shopping for credit. With very limited exceptions, TILA doesn’t cap interest rates. Instead, it standardizes disclosure requirements to make it easier for consumers to compare financial products.

These are some of the law’s main objectives:

• Requiring lenders to assess a borrower’s ability to repay
• Standardizing financial disclosures so consumers can compare their options
• Establishing a right of rescission (right to back out) for some types of mortgages
• Protecting consumers from unfair or deceptive lending practices
• Establishing procedures for disputing billing errors

TILA applies to many kinds of consumer credit, including the following:

• Mortgages
• Credit cards
• Home equity loans 
• Home equity lines of credit (HELOCs)
• Car loans
• Personal loans (including payday loans)

Notably, the law doesn’t apply to student loans or business debts.

What lenders are required to disclose under TILA

You may wonder, “What is TILA for?” This law aims to make sure consumers are well-informed before they take on debt.

Unfortunately, some lenders may try to avoid important disclosures (like the total borrowing cost) to increase the chances that a consumer will accept a loan. To combat this, TILA requires lenders to disclose important information like the following.

Annual percentage rate

The annual percentage rate (APR) of a credit card or loan isn’t the same thing as an interest rate. The APR tells you the total cost of taking out the credit, including interest and other fees. It’s expressed as a yearly percentage.

Amount financed

This is the amount you’re borrowing. It excludes fees and interest.

Finance charge

The finance charge is the total interest and fees you’ll pay if you make all payments on time.

Total payments

This number includes the sum total of all payments you’ll make over the term of the loan.

Late fees

Lenders must tell you when they will charge late fees and how much those fees will be.

Prepayment penalty

Some installment loans have prepayment penalties, meaning that if you pay off the loan early, you have to pay an additional fee. TILA requires lenders to tell you whether your loan has a prepayment penalty.

TILA protections

TILA is a far-reaching law that applies to many kinds of credit. When you take out a loan, the lender must make the disclosures described above. 

The law includes additional protections specific to certain types of credit. Here are some of them.

Credit cards

TILA requires lenders to have an application process in place for credit cards. Before the law was passed, lenders could give consumers unsolicited credit cards.

The law also limits a consumer’s liability for unauthorized use of an account to $50. This means that if someone steals your credit card and maxes it out, you may only be held liable for the first $50. However, most credit card companies offer zero-liability fraud protection

TILA also outlines procedures for disputing other kinds of transactions. For example, if you use a credit card to buy something and the product isn’t delivered as promised, you may dispute the transaction with your card issuer.

Importantly, before issuing a credit card (or any other kind of open-ended credit), lenders must assess a borrower’s ability to repay.

TILA has been modified several times over the past decades. One of the most important changes was the addition of the Fair Credit and Charge Card Disclosure Act (FCCCDA) of 1988. This law established a specific table format for credit card disclosures.

That table is sometimes called a “Schumer box” after Senator Chuck Schumer. It requires key details (like a credit card’s APR) to be printed in larger fonts. Because the table is noticeable and consistent across all credit cards, it makes it much easier for consumers to comparison shop.

Mortgages

Just like with credit cards, TILA requires mortgage lenders (as well as lenders issuing other kinds of credit) to look at a borrower’s ability to repay. For mortgages, this requirement is called the Qualified Mortgage (QM) rule.

The law also establishes a right of rescission for home equity loans and other loans secured by your current home. This means that once you sign the loan document, you have three days to back out without penalty.

TILA was designed to protect consumers from various types of predatory lending. Fittingly, it bars mortgage lenders from encouraging borrowers to choose higher-commission products that don't offer additional consumer benefits.

Conclusion

TILA doesn't cap what lenders can charge you, but it does force them to tell you exactly what you're agreeing to.

Knowing that, the practical takeaway is to read the disclosures you're given rather than skimming past them. Compare the APR rather than the interest rate, check for prepayment penalties, and look at the total payments figure before signing anything.

Your credit profile still determines which terms you're offered in the first place, since lenders must assess your ability to repay.

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