The Truth In Lending Act enables buyers to compare the costs of borrowing from different lenders. The Truth In Lending Act, under Regulation Z requires lenders to disclose the terms and costs of all loan plans, including:
- the annual percentage rate, points and fees,
- the total of the principal amount being financed,
- payment due date and terms,
- including any balloon payment where fees would be charged,
- including the highest rate the lender would charge,
- how it is calculated and the monthly payment,
- total finance charges, whether the loan is assumable, application fees, annual or one time fees and pre-payment penalties.
The simple interest method & the pre-computed basis method are the two methods permissible by the civil code (see: http://www.dmv.ca.gov/pubs/vctop/appndxa/civil/civ2981.htm).
“Simple-interest basis” means the determination of a finance charge, other than an administrative finance charge, by applying a constant rate to the unpaid balance as it changes from time to time either:
- Calculated on the basis of a 365-day year and actual days elapsed (although the seller may, but need not, adjust its calculations to account for leap years); reference in this chapter to the “365-day basis” shall mean this method of determining the finance charge, or
- For contracts entered into prior to January 1, 1988, calculated on the basis of a 360-day year consisting of 12 months of 30 days each and on the assumption that all payments will be received by the seller on their respective due dates; reference in this chapter to the “360-day basis” shall mean this method of determining the finance charge.
“Pre-computed basis” means the determination of a finance charge by multiplying the original unpaid balance of the contract by a rate and multiplying that product by the number of payment periods elapsing between the date of the contract and the date of the last scheduled payment.
- Usury laws have been eliminated and rates do vary.
- Regardless of the method, the rate must be converted into an annual percentage rate applicable to the unpaid balance.
- The unpaid balance, using the annual percentage rate must then be computed into a base monthly payment over the term of the contract.
*This allows a comparison between dealers for a similar vehicle.
For Civil Code Lending Requirements go to: