How to Read a Truth-in-Lending Disclosure
By Jill Terry
disclosures are designed to standardize the way loan features
are presented to borrowers. While they do accomplish that
mission, most consumers have little idea what they're looking
at. Here's a crash course in reading a Truth-in-Lending disclosure.
What Does It Look Like?
A PDF version of a Truth-in-Lending Disclosure Statement can
be seen at the Genesis
Web Builder site. You'll need Adobe Acrobat Reader to
When Do You Get One and Why?
Your bank (or lender) has to give you a Truth-in-Lending disclosure
before the first transaction (i.e., before the loan period
officially begins or the first payment is due). You also have
a right to request a Truth-in-Lending disclosure whenever
you shop for credit, even if you aren't planning to transact
business with that particular lender. The form helps you compare
lenders to find the best rates, fees, minimum payments, and
other payment terms.
What's On It?
Many fees and charges are provided, but the primary aspects
are set off in boxes at the top. The idea behind making them
so prominent is to allow you to scan those boxes quickly and
get a general sense of how much a loan will cost with that
- Annual Percentage Rate: This is the cost of your
credit expressed as an annual rate. This is not the same
as the interest rate. The APR takes into account the finance
charge amounts--helpful information if you're pricing loans
among several banks. Financial institutions may advertise
the same interest rate but when you compare their APRs,
you'll probably see differences. Higher APRs generally mean
you're paying more fees.
- Finance Charge: This is the dollar amount you will
pay for both interest and certain fees. The writers of Regulation
Z (the federal Truth-in-Lending Act) determine what fees
qualify as finance charges. Read more about finance fees
in another MsMoney article.
- Amount Financed: Basically, this is the amount
of money being loaned to you, but there are some complications.
The amount financed represents:
- The principal loan amount.
- Amounts financed by the creditor but not part of the
finance charge (you see this most often in real estate
- Less any prepaid finance charges. (Common examples
of prepaid finance charges include: buyer's points,
service fees, loan fees, finder's fees, loan guarantee
insurance, credit investigation fees. However, in order
for these or any other finance charges to be considered
prepaid, they must be either paid separately in cash
or check or withheld from the proceeds. Prepaid finance
charges include any portion of the finance charge paid
prior to or at closing or settlement.)
- Total of Payments: The scariest disclosure of all.
This figure tells you what you will have paid the lender
at the end of the loan. It represents the loan amount, plus
fees, finance charges and interest.
Comparing these four components of a Truth-in-Lending disclosure
provides you with the basic loan costs. Rely on it when you're
shopping for credit and also to learn about how much an approved
loan ultimately will cost you.