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The Truth in
Lending Act (TIL), also known as Title I of the Consumer
Credit Protection Act, was enacted to assist consumers in
shopping for credit. The law's stated goal is:
"...to assure
a meaningful disclosure of credit terms so that the consumer
will be able to compare more readily the various credit
terms available to him..."
In the past, it
was not unusual for credit sellers to advertise misleading or
varying credit terms that proved confusing to consumers in
practice.
Interest can be
calculated in various ways. If one retailer computes simple
interest while another uses compound interest, then the former
will charge less for the credit. Confusingly, even compound
interest can be calculated differently. Compounding can be
done on a daily, weekly, or monthly basis. Additionally, the
seller can use the highest, lowest, or average monthly balance
in computing the interest.
Additionally,
unscrupulous sellers could offer a "low ball"
interest rate and earn back additional profit by tacking on
additional fees. For example, assume that two retailers offer
credit terms. One retailer offers credit at 11 percent simple
interest. The other retailer offers 10 percent simple interest
but unlike the first retailer, also charges certain loan fees
to originate the credit transaction.
Assume that a
buyer purchases $1,000 of goods from this seller, and repays
the balance exactly one year later. In addition to interest,
the seller charges the buyer a loan origination fee of $25 and
also bills for its standard credit check of $25. In this
instance, the buyer will be paying back a total of $1,150
comprised of $1,000 for the goods, $100 of interest at 10
percent, and $50 in fees. If the buyer had purchased the goods
from the seller charging 11 percent interest and no fees, the
buyer would have only repaid $1,100. The imposition of various
processing charges and the confusing use of different credit
terms make it extremely difficult for even sophisticated
business people to compare credit terms. To remedy this
problem, Congress enacted the Truth In Lending Act. The law is
implemented by the Federal Reserve Board and under government
agencies under a set of rules called "Regulation Z."
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