What the Truth in Lending Act Does

Jan 6, 2016 by

What the Truth in Lending Act Does

By Phineas Upham

If this were 1965, and you were trying to buy a car you might run into some trouble if you tried to buy a car the way consumers do it today. First and foremost, there is no Internet so pricing a car is very different. If you got talked into a loan you couldn’t pay, banks could garnish your wages with the burden being placed squarely on your shoulders.

Truth in Lending changed some of that.

The Act was designed as a safeguard for consumers, and it helped give prospective buyers options to shop around. It didn’t just apply to the automotive landscape, but the effects were felt most prominently there.

If you’re old enough to remember the beginning of 0% APR financing, you might not be aware that this is an indirect effect of Truth in Lending. Failure to properly differentiate between a finance charge, and the amount financed, meant that a potential lender could just roll the extra interest from a loan into the loan itself. They could package the loan as a 0% APR loan, leading consumers to believe they would save thousands, and reap the rewards.

APR was mandated by Truth in Lending, and it was meant to help consumers gauge how favorable a loan’s terms were to their particular circumstance. However, deals like “0% APR financing or $1,000 cash back” masked what the consumer could potentially get. Which is the better deal?

The Act was passed in 1968, and has helped a great deal in standardizing the costs of lending.

Phineas Upham is an investor from NYC and SF. You may contact Phin on his Phineas Upham website or Twitter page.

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