The Truth in Lending Act (RA 3765) protects borrowers by requiring creditors to disclose, before a credit transaction is consummated, the true cost of credit. The creditor must furnish the borrower a clear statement in writing setting out: the cash price or delivered price of the property or service; the amounts credited as down payment or trade-in; the difference between the two; the charges, individually itemized, that are paid or to be paid in connection with the transaction but not incident to the extension of credit; the total amount to be financed; the finance charges expressed in pesos; and the percentage that the finance charge bears to the total amount to be financed, expressed as a simple annual rate. The purpose is to let borrowers know the real interest and charges and to compare credit terms, preventing hidden charges. If a creditor fails to make the required disclosures, the borrower may recover the prescribed penalty, and undisclosed charges may not be collected. So a lender cannot spring hidden fees or a higher effective rate on a borrower who was not properly informed.
The Right to Know the Cost of Credit
Under RA 3765, before a credit transaction, the creditor must disclose in writing the true cost of credit.
What Must Be Disclosed
- The cash price and any down payment/trade-in;
- The itemized charges and the total amount to be financed;
- The finance charge in pesos; and
- The finance charge as a percentage (simple annual rate).
Consequences of Non-Disclosure
If the creditor fails to disclose, the borrower may recover the prescribed penalty, and undisclosed charges may not be collected. Hidden fees cannot be sprung on an uninformed borrower.
Practical Takeaways
- Lenders must disclose the true cost of credit before the loan;
- You are entitled to know the finance charge and effective rate;
- Undisclosed charges generally cannot be collected.
Frequently Asked Questions
What does the Truth in Lending Act require? That creditors disclose, before a credit transaction, the true cost of credit, including the itemized charges, the total amount financed, the finance charge in pesos, and the finance charge as a simple annual percentage rate.
Why is the disclosure required? To let borrowers know the real interest and charges, compare credit terms, and avoid hidden charges.
What if a lender doesn't disclose the charges? The borrower may recover the prescribed penalty, and undisclosed charges may not be collected. A lender cannot spring hidden fees or a higher effective rate on an uninformed borrower.
What must be stated as the interest rate? The finance charge expressed as a percentage of the total amount to be financed, stated as a simple annual rate, so the borrower knows the effective cost.
This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.
If you have questions about your rights or options under Philippine law, our firm is available to assist. You may reach us via Viber or WhatsApp, call us at 0995 433 5550, or send an email to vivasnobles@gmail.com. We look forward to hearing from you.