The Truth in Lending Act (TILA) applies to most consumer loans, including auto loans. Its purpose is to ensure that borrowers are provided with clear and accurate information about the terms and costs of the loan, empowering them to make informed financial decisions. Here’s how TILA specifically impacts auto loans:
Terms used in the Truth-in-Lending disclosure
- Annual Percentage Rate (APR) – The APR is the total cost of credit, including the interest rate and mandatory fees, expressed as a yearly rate in a percentage. It is not the same as the interest rate and can be significantly higher with added fees.
- Finance Charge – The total amount of interest and certain fees you will pay over the life of the loan if you make every payment when due.
- Amount Financed – The amount you’re borrowing.
- Total of Payments – The sum of all the payments that you will have made at the end of your loan term. This includes the projected cost of repaying the principal amount of the loan plus all of the finance or interest charges.
The TILA disclosures will also include other important information, such as the number of payments, late fees, whether you can prepay your loan without a penalty, and other important terms.
How TILA Protects Auto Loan Borrowers
- Transparency:
- Borrowers must receive a detailed disclosure document (sometimes called a TILA disclosure) before the loan is finalized. This document outlines all costs and terms associated with the loan.
- Prevention of Hidden Fees:
- TILA ensures that all fees, including add-ons like extended warranties or service contracts, are disclosed upfront and included in the finance charge if applicable.
- Standardized Information:
- All lenders are required to present information in a uniform way, making it easier for borrowers to compare offers from multiple lenders.
- Prohibition of Deceptive Practices:
- Lenders cannot misrepresent the loan terms, such as falsely advertising a lower interest rate or APR.
- Right to Rescind (in Certain Cases):
- While TILA’s right to rescind does not generally apply to auto loans, it does apply to certain situations where your home is used as collateral for the loan
Common Auto Loan Issues Addressed by TILA
- Spot Delivery/Yoyo Scams:
- Some dealers allow consumers to drive off the lot before finalizing financing, only to later change the loan terms. TILA requires that any changes to the loan terms be disclosed and agreed upon by the borrower.
- Add-Ons and Extras:
- Dealerships often sell optional add-ons like GAP insurance or extended warranties. Under TILA, the cost of these add-ons must be disclosed and included in the loan\u2019s finance charge if financed.
- Balloon Payments:
- If your auto loan includes a balloon payment (a large lump sum due at the end of the loan), this must be clearly disclosed under TILA.
When you’ll receive your Truth-in-Lending disclosure
Your TILA disclosure is often provided with your loan contract. However, you should request it before you sign your contract so you can review it in detail and make sure you understand all of the information. You also want to make sure it aligns with the information and rates you’ve been given and that there are no hidden costs. TILA also requires that borrowers be provided with a fully filled in form and not a blank disclosure for consideration.
If you feel uncomfortable or pressured into signing, you can always walk away. If you experience any issues with receiving your Truth-in-Lending disclosures, you can submit a complaint with the CFPB.