If you have ever applied for credit of any kind, you have probably heard of the truth in lending laws. The Truth in Lending Act was created in 1968 as federal law of the United States. The reason why it was created was to give consumers information related to credit. It required particular disclosures about the terms and cost of credit. The Act also gave consumers the right to cancel particular credit transactions which involve a lien on the consumer’s principal property. In addition, it regulated certain credit card practices and gave processes to require a fair and timely resolution of any credit disputes.
The Truth about Truth in Lending
Contrary to popular belief, the Truth in Lending Act does not regulate the charges that may be assessed against consumer credit. Instead, it requires a standardized disclosure of the charges and costs that consumers can then compare with other creditors. By having this uniform standard for presenting the terms of consumer credit, individuals have a much easier time of comparing and shopping for the best credit options. Instead of things being shielded and hidden from the consumer, this gives power back to people as they need to make informed choices about credit.
Before the Truth in Lending Act, there were no required definitions of loan terms that consumers could view. That meant that consumers couldn’t really compare interest rates and other loan costs. Of course, that meant that fraud and scams were rampant because lenders were taking advantage of the fact that consumers had no way of comparing apples to apples.
What Are Open Ended and Closed Ended Credit Transactions?
The Truth in Lending Act applies to those “open ended” and “closed ended” credit transactions. Open-ended credit is recurring to things such as revolving charge accounts and credit cards. Closed ended transactions is referring to borrowing a specific amount of money that you then pay back over time, such as a bank loan for car or a signature loan. One important part of the Truth In Lending Act is that it is very protective of someone who is putting their home up as collateral for a consumer loan. It gives the consumer the right to rescind the line within three business days which is normally referred to as a “3 day right of rescission”.
The Truth in Lending Act requires specific terms to be disclosed. These include any finance charges, the annual percentage rate, the amount financed, the schedule of payments and the total of payments. Many of these factors are not able to be known when we’re talking about open-ended credit. With open ended credit, the lender must disclose the APR and whether or not you have a grace period to avoid paying any finance charges if you have not paid in full by the due date. Lenders must also disclose whether or not there is an annual fee on your credit card. It is important to know these factors about your credit card so that you don’t dig yourself into a financial hole that ends up causing you other issues.
