Consumer Handbook to Credit Protection Laws (Part 1)
...... a difference. Be sure to look at all the terms before you make your choice.
Cost of Open-end Credit
Open-end credit includes bank and department store credit cards, gasoline company cards, home equity lines, and check overdraft accounts that let you write checks for more than your actual balance with the bank. Open-end credit can be used again and again, generally until you reach a certain prearranged borrowing limit. Truth in Lending requires that open-end creditors tell you the terms of the credit plan so that you can shop and compare the costs involved.
When you're shopping for an open-end plan, the APR you're told represents only the periodic rate that you will be charged--figured on a yearly basis. (For instance, a creditor that charges 1% percent interest each month would quote you an APR of 18 percent.) Annual membership fees, transaction charges, and points, for example, are listed separately; they are not included in the APR. Keep this in mind and compare all the costs involved in the plans, not just the APR.
Creditors must tell you when finance charges begin on your account, so you know how much time you have to pay your bill before a finance charge is added. Creditors may give you a 25-day grace period, for example, to pay your balance in full before making you pay a finance charge.
Creditors also must tell you the method they use to figure the balance on which you pay a finance charge; the interest rate they charge is applied to this balance to come up with the finance charge. Creditors use a number of different methods to arrive at the balance. Study them carefully; they can significantly affect your finance charge.
Some creditors, for instance, take the amount you owed at the beginning of the billing cycle, and subtract any payments you made during that cycle. Purchases are not counted. This is called the adjusted balance method.
Another is the previous balance method. Creditors simply use the amount owed at the beginning of the billing cycle to come up with the finance charge.
Under one of the most common methods-the average daily balance method--creditors add your balances for each day in the billing cycle and then divide that total by the number of days in the cycle. Payments made during the cycle are subtracted in arriving at the daily amounts, and, depending on the plan, new purchases may or may not be included. Under another method--the two-cycle average daily balance method--creditors use the average daily balances for two billing cycles to compute your finance charge. Again, payments will be taken into account in figuring the balances, but new purchases may or may not be included.
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Be aware that the amount of the finance charge may vary considerably depending on the method used, even for the same pattern of purchases and payments.
If you receive a credit card offer or an application, the creditor must give you information about the APR and other important terms of the plan at that time. Likewise, with a home equity plan, information must be given to you with an application.
Truth in Lending does not set the rates or tell the creditor how to calculate finance charges--it only requires that the creditor tell you the method that it uses. You should ask for an explanation of any terms you don't understand.
Leasing Costs and Terms
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Leasing gives you temporary use of property in return for periodic payments. It has become a popular alternative to buying--under certain circumstances. For instance, you might consider leasing furniture for an apartment you'll use only for a year. The Consumer Leasing law requires leasing companies to give you the facts about the costs and terms of their contracts, to help you decide whether leasing is a good idea.
The law applies to personal property leased to you for more than four months for personal, family, or household use. It covers, for example, long-term rentals of cars, furniture, and appliances, but not daily car rentals or leases for apartments.
Before you agree to a lease, the leasing company must give you a written statement of costs, including the amount of any security deposit, the amount of your monthly payments, and the amount you must pay for licensing, registration, taxes, and maintenance.
The company must also give you a written statement about terms, including any insurance you need, any guarantees, information about who is responsible for servicing the property, any standards for its wear and tear, and whether or not you have an option to buy the property.
Open-end Leases and Balloon Payments
Your costs will depend on whether you choose an open-end lease or a closed-end lease. Open-end leases usually mean lower monthly payments than closed-end leases, but you may owe a large extra payment--often called a balloon payment--based on the value of the property when you return it.
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Suppose you lease a car under a three-year open-end lease. The leasing company estimates the car will be worth $4,000 after three years of normal use. If you bring back the car in a condition that makes it worth only $3,500, you may owe a balloon payment of $500.
The leasing company must tell you whether you may owe a balloon payment and how it will be calculated. You should also know that:
-- you have the right to an independent appraisal of the property's worth at the end of the lease. You must pay the appraiser's fee, however.
-- a balloon payment is usually limited to no more than three times the average monthly payment. If your monthly payment is $ 200, your balloon payment wouldn't be more than $600--unless, for example, the property has received more than average wear and tear (for instance, if you drove a car more than average mileage).
Closed-end leases usually have higher monthly payment than open-end leases, but there is no balloon payment at the end of the lease.
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