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Let's see how you can use the information required by the TILA to get the best deal for you in financing a used car having a cash price of $5,000. You have $1,000 in savings to make a down payment on the car and need to borrow the remaining $4,000. Suppose that by shopping around you find the four possible credit arrangements shown below:
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APR Length of Loan Monthly Payment Total Finance Charge
Creditor A 11% 3 years $131 $714
Creditor B 11% 4 years $103 $962
Creditor C 12% 4 years $105 $1,056
Creditor D 12% 2 years $188 $519
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[Please note that the figures for total finance charge are correct, even though not precisely equal to the sum of the payments less the amount financed ($4,000). Creditors often round off monthly payments to the nearest dollar, and adjust the final payment to make up the difference.]
Let's begin with an easy decision. Notice that the four-year loan of Creditor B is a better deal than the four-year loan of Creditor C. Since their lengths are equal, we know that an 11-percent loan is cheaper than a 12-percent loan for the same amount of money. Forget about Creditor C.
However, look what happens when the lengths of the loans vary: Even though Creditors A and B charge an APR of 11 percent, the total dollar finance charge is a good deal greater on the 4-year loan from Creditor B than on the 3-year loan from Creditor A. Of course, the difference makes sense, since with Creditor B you would have another year to use the lender's money. You have to decide whether you would like to have the lower monthly payment that is available on the longer loan. Note that it doesn't help to look just at the total finance charge, which is lowest on the loan from Creditor D. But that creditor charges 12 percent rather than the 11 percent available from Creditors A and B. The only reason the total finance charge is the lowest of the four is that you would have the use of the creditor's money for only two years. Forget Creditor D.
Thus, your choice narrows to Creditor A vs. Creditor B, and which you choose depends on how easy it will be to meet the monthly payments. And, a big decision is whether having a car today, rather than later, is worth the monthly payments at the 11 percent financing rate.