Assessing the Price of Short-Term Credit

In 1968 Congress passed the Truth in Lending Act (TILA) to require written disclosures of key credit terms for consumers, including finance charges, payment sizes, payment totals, and interest rates mathematically calculated as a defined Annual Percentage Rate (APR). Much has changed in the markets for consumer credit since passage of TILA, including widespread quotation, discussion, and even advertising of APRs mandated by TILA for disclosures. It does not follow, however, that APRs are the only terms important to consumers or even the most useful in all situations. This paper examines current TILA disclosures relevant to short-term-credit customers. Employing examples, it shows that finance charges expressed in dollars can be more useful for these loan customers than APRs, since finance charges are close to theoretically correct for the purposes intended, easier to understand, more directly related to the time period of the loan, and able to differentiate among varying costs of small amounts of short-term credit better than APRs. Although these findings do not argue for a wholesale change in the legal scheme of TILA, they do help explain evidence that dollar charges have long been of greater concern to some consumers than interest rates, why a focus among some consumers on charges expressed in dollars rather than APRs should not be considered disturbing, and that some reasonable renovations might be in order to improve the usefulness of TILA disclosures