Buying on credit has been and will continue to be a key way for consumers to obtain the goods and services they need now but want to pay later.

The law provides a number of protections to consumers involved in the credit process. The federal Truth in Lending Act requires creditors to provide information that will help the consumer decide whether to buy on credit and if so, what terms may be best for the situation.

For example, before a buyer signs an installment contract, specific information about the amount being financed, the number of monthly payments, and the annual percentage rate (APR) must be supplied. The APR is essentially the interest rate that the borrower will pay on the loan. Its intended purpose is to make it easier for a borrower to compare loan options, but the way they are stated can be tricky.

An annual interest rate of 10% can, for example, be expressed in several ways:

1. 0.7974% effective monthly interest rate
2. 9.569% annual interest rate compounded monthly
3. 9.091% annual rate in advance

While these rates are all equivalent, they can be confusing to the consumer.

The Truth in Lending Act also regulates credit advertising. For example, if an automobile ad emphasizes a low monthly payment of a specific amount, it must also include other information such as the APR.

Before signing a contract, especially for a large purchase, it’s advisable to check with an attorney.

Note: This information was prepared as a public service by the Illinois State Bar Association and is a joint project with the Illinois Press Association. Its purpose is to inform citizens of their legal rights and obligations.