What is all that financial information at the bottom of every credit and/or loan contract? That is the Truth in Lending Act at play. In this article, you’ll learn what the Truth in Lending Act is, how it regulates car dealers, and what to look out for as a car dealer in order to protect yourself.
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What is the Truth in Lending Act?
The Truth in Lending Act (TILA) is a federal law that was enacted in 1968 to protect consumers when dealing with lenders and/or creditors. Amongst other regulations, TILA requires lending and credit contracts to disclose specific information to a borrower before extending credit to them. For example, if you’ve ever seen a retail installment sales contract, you’ve seen a Truth in Lending “box.” That’s that box in the retail installment sales contract that states the following items:
- the sale price
- the amount financed
- the interest rate
- the cost of the financing
- the amount of interest that’s being paid over the loan,
- there is typically a payment schedule below these items + what’s necessary to pay off the car
What is Regulation Z?
Another interesting detail within the Truth in Lending Act that many dealers run into is called Regulation Z– it’s arguably one of the most important regulations to pay attention to because it governs the car dealer, specifically the car sales, lending, and secured interests in lending. In my practice, I regularly see dealers charge a different price on a vehicle based on credit versus cash. That is illegal and is not allowed per the Truth in Lending Act. It may also be prohibited by State laws and other things, but it’s certainly prohibited by the Truth in Lending Act. What that means is a customer that comes in wanting to buy a car with cash has to be given the same price as a customer wanting to buy a car on credit. Now, of course, interest rates change. The amount that’s paid over the course of the loan is different because the credit consumer pays interest. This does not mean the total amount of the loan has to be the same, but what it means is on the bill of sale, the price of the car must be the same.
Sometimes the State will actually send in a secret shopper to unearth such inconsistencies. For example, one secret shopper will come in as a cash customer and another as a credit customer to ensure they both get the same price for the same vehicle. If the secret shoppers are given different prices, that is a violation. This is all to say, the Truth in Lending Act not only governs some of the loan documentation and what must be in the document, but it also regulates other things such as credit disclosures and cash vs. credit pricing for a vehicle.
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