Truth in Lending Act (TILA) | Definition and Explanation
What is the Truth in Lending Act (TILA)?
The Truth in Lending Act (TILA) is a United States banking law signed in 1968 designed to protect consumers from predatory lenders and creditors.
Predatory lending is the practice of issuing loans that unfairly convince consumers to take on a loan that they are unable to pay back.
The Truth in Lending Act makes it mandatory for creditors to disclose vital information and terms for a credit loan in order to make it easier for the prospective borrower to compare with other, similar financial products.
Before the act was passed, many consumers were left confused about what exactly they had signed up for.
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What is Included in TILA?
While each credit loan has different terms and conditions, TILA imposes a standardized system for disclosures of credit terminology and rates.
Information that lenders must disclose includes:
- The total annual loan cost rate, not merely the nominal interest rate which does not factor in fees or interest compounding on a smaller time frame than 1 year
- The term period
- Risks associated with different contract choices, such as variable interest rates or balloon payments. The risk associated with variable interest rates, for example, is that they change over time, so the amount you pay may become greater than the original amount you signed for.
The Truth in Lending Act covers a wide variety of loans including:
Loans covered under TILA also grant consumers the right to rescission, or the right to withdraw from a loan.
Consumers have three days to reconsider their decision and back out of the loan process without losing money.
In addition to protecting consumers by making disclosures mandatory, TILA also regulates certain loan provisions and topics.
- It imposes amount limits for certain types of credit loans.
- It also sets interest rate caps on the amount of interest that lenders can charge customers. These rate caps take state regulations into consideration.
- It mandates that banks can only sell loans that are in a consumer’s best interest.
But TILA does not provide guidance on setting interest rates, nor does it give criteria for banks to evaluate a customer’s credit-worthiness.
Truth in Lending Act FAQs
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.