The Truth in Lending Act (TILA) is a United States federal law designed to protect consumers in credit transactions by requiring clear disclosure of key terms of the lending arrangement and all costs. The statute is contained in title I of the Consumer Credit Protection Act. The regulations implementing them are known as "Regulation Z".

The purpose of TILA is to promote the informed use of consumer credit by requiring disclosures about its terms and cost. TILA also gives consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling. The APR calculation is the primary component of TILA. And while the intention of this disclosure is admirable, the APR output is misleading in the practical world.

The first practical inaccuracy of APR is that the only lender fees are factored into the equation which, as you know, leaves out plenty of expenses. Most notably (and expensively) attorney, appraiser and title fees.

The real trouble with the APR calculation though is that it assumes that the borrower makes all 360 payments as scheduled and without a single dollar in excess principal payments. I think you would agree that anymore people have better odds of winning Survivor or piloting the space shuttle.

This is what is known to most folks as fantasy. And the APR numbers we give our borrowers while technically correct, are really just fantasy.

To be continued...