What are Truth in Lending laws?

The Truth in Lending laws were passed by Congress in 1969 and are part of the Consumer Credit Protection Act. They require anyone who extends credit to a consumer to fully disclose the credit terms, including:

  • How finance charges were computed
  • The annual percentage rate
  • The total finance charge over the life of the loan
  • Payment schedule and total number of payments that will be made over the life of the loan
  • Prepayment penalties (if any)
  • Late payment terms
  • If you have an adjustable rate mortgage (ARM), the lender must disclose the maximum interest rate that can be charged.
  • When and how finance charges are imposed

These things must be disclosed up front, in writing, and in terms that are easy to understand.

In addition, the real estate section of the Truth in Lending Act gives consumers something called a "Right of Rescission" on refinancing and line of credit transactions. It means that you have three business days (from the date you sign the agreement) to back out of a loan, no questions asked. The lender cannot charge you any kind of cancellation fee.

The purpose of Truth in Lending Laws is to ensure that consumers make informed decisions regarding extensions of credit. While creditors are required to disclose certain information, it's still the consumer's responsibility to research creditors and credit terms.

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