Short answer: for a fixed term consumer loan, the lender must give you a Truth in Lending disclosure before the loan is made (12 CFR 1026.17(b)). Four boxes carry the cost: the amount financed, the finance charge, the annual percentage rate and the total of payments. Below them come the payment schedule and the terms that change what you owe: late charges, prepayment, security and insurance (12 CFR 1026.18). This guide walks through one example and shows how to check that the numbers add up.
The example loan
Assumptions: a $5,000 loan at a 10% interest rate for 36 months, with a $250.00 origination fee taken out of the loan. These are example figures, not an offer.
The four boxes
| Box | What the rule says it is | In the example |
|---|---|---|
| Annual percentage rate | The cost of your credit as a yearly rate | 13.56% |
| Finance charge | The dollar amount the credit will cost you | $1,058.24 |
| Amount financed | The amount of credit provided to you or on your behalf | $4,750.00 |
| Total of payments | The amount you will have paid when you have made all scheduled payments | $5,808.24 |
Descriptions are from 12 CFR 1026.18(b), (d), (e) and (h). The APR here is higher than the 10% interest rate because the fee counts in the finance charge; why that happens is in our APR vs interest rate guide.
Check the numbers yourself
- Payment schedule: 36 payments of $161.34. Number of payments times the payment should match the total of payments: 36 x $161.34 = $5,808.24. On a real disclosure the last payment can differ by a few cents because of rounding.
- Amount financed: the loan amount minus any prepaid finance charge, such as a fee taken out at the start (1026.18(b)): $5,000 minus $250.00 = $4,750.00.
- Finance charge: total of payments minus amount financed: $5,808.24 minus $4,750.00 = $1,058.24. For an amount financed over $1,000 the disclosed finance charge counts as accurate if it is within $10 of the right figure (1026.18(d)(2)).
- APR: you cannot easily check it by hand, but it should be higher than the interest rate whenever there is a fee in the finance charge. Paste the payment, the number of payments and the amount financed into a calculator that solves for the rate.
The itemization of the amount financed
The lender must show where the amount financed goes, or tell you that you have the right to a written itemization (1026.18(c)). It lists money paid to you, money paid to others on your behalf and the prepaid finance charge. In the example:
| Item | Amount |
|---|---|
| Paid to you | $4,750.00 |
| Paid to others on your behalf | $0.00 |
| Prepaid finance charge (origination fee) | $250.00 |
If you expected more cash than the "paid to you" line, ask why before you sign. Check that any payment to others, such as a payoff of another debt, is one you agreed to.
The other lines to read
| Line | What to look for |
|---|---|
| Variable rate | Whether the APR can go up, what limits apply, and an example of the payment after an increase (1026.18(f)). |
| Late payment | Any dollar or percentage charge for paying late (1026.18(l)). See missed payments. |
| Prepayment | Whether there is a charge for paying early, or a rebate (1026.18(k)). See prepayment penalties. |
| Security | Whether the lender takes an interest in property, such as a car (1026.18(m)). See secured vs unsecured loans. |
| Insurance | Credit insurance can be left out of the finance charge only if it is not required, that is disclosed in writing with the premium, and you sign or initial a request for it (12 CFR 1026.4(d)(1)). If you did not ask for it, do not sign for it. |
| Contract reference | A statement telling you to see the contract for terms such as default and prepayment. Read those sections too. |
Before you sign
- Compare two offers by the same amount and term, using the APR and the total of payments.
- Make sure the payment and the number of payments match what you were told.
- Ask about any line you do not understand, and do not sign until the numbers add up.
- If a lender will not give you the disclosure before you sign, or the numbers do not match, you can complain. See how to file a loan complaint.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.