The True Cost of Borrowing
To help consumers understand the true cost of a loan, federal law requires that lenders provide a Truth in Lending Act disclosure showing key terms of the lending arrangement and all costs. All Truth in Lending disclosures must follow a uniform format, making it easier for the consumer to compare loans.
Lenders are required to show an annual percentage rate, or APR, on the disclosure. The APR includes the rate of interest being charged and all fees collected at the time the loan is made.
While the APR may not always include all costs, it is a reasonable indicator of the cost of your loan. In Truth in Lending Act disclosures, the APR and the finance charge stand out.
For example, in the illustration below the APR is shown in the disclosure's Federal Box, which appears near the top of the Truth in Lending Act disclosure.
Truth In Lending Disclosure - Federal Box
|Annual Percentage Rate||Finance Charge||Amount Financed||Total of Payments|
|The cost of your credit as a yearly rate||The dollar amount the credit will cost you||The amount of credit provided to you or on your behalf||The amount you will have paid after you have made all payments as scheduled|
While the APR is a good measurement, it may not always be the best indicator of a loan that best fits your particular circumstances. You also need to consider other factors, like whether the fee allows you to have all the money you need at the time you take out the loan.