Your bank must give you a proposal on which you will find a sometimes incomprehensible precision: the annual effective annual rate (APR).
This term, generally followed by a percentage, you could also find it on advertisements or on prospectuses touting the offers and other conditions of credit institutions.
APR: a legal obligation of banks intended for borrowers
The overall effective annual rate intrigues you and you want to have all the information on these bank details so that your monthly payments do not exceed your repayment capacity…
Here are some answers that will allow you to use the APRC for analysis purposes and for an easy comparison of multiple banking proposals.
What is the APR?
This is the interest rate set by any financial institution offering loans: it is the effective reference rate that all borrowers must know before accepting the offer from their bank.
This rate is applied to consumer loans (a personal loan for example or a work loan) and to mortgage loans from October 1, 2016.
It is an element of calculation of the total cost of the credit which you are taking out. Because, if you don’t know, to borrow from a bank is to buy a service: the interest rate is none other than the price of this service.
When we talk about reimbursement, it is, therefore, a question of returning the money borrowed while paying the price of the service. The banks do not arbitrarily determine their TEG insofar as French law strictly controls its method of calculation and its amount. Thus, an APR cannot be higher than the usury rate determined by Good Finance. The usury rate indicates the maximum legal rate applicable in terms of credit.
What does the law say?
The overall effective rate (TEG) is defined by article L314-5 of the Consumer Code.
Its method of calculation is specified in articles R314-6 to R314-14 of the same code. It is also recommended to consult Decree No. 2002-928 of June 10, 2002, relating to the calculation of the overall effective rate applicable to consumer credit. The text is regularly updated with the draft laws and European directives.
In addition, the system governing the APR is enriched by the provisions of French law n ° 2014-1662 of 30/12/2014, published in OJ n ° 302 of December 31, 2014. It aims to adapt to the country’s legislation to the law of the European Union in the economic and financial fields.
Is the APR framed by European law?
The European Union confirms the need for the overall effective annual rate in its directive of February 4, 2014, on consumer credit contracts linked to the acquisition of real estate intended for residential (residential) use. In the same text, the parliament and the European Council impose the method of calculating the Annual Effective Annual Rate.
The European directive was published in the official journal of the European Union on February 28, 2014, and then transposed to French law by Decree No. 2016-622 of May 19, 2016, and Decree No. 2016-607 of May 13, 2016. Then, still in France, an ordinance of March 25, 2016, bearing the n ° 2016-351 and whose content is partially based on the European directive, allowed, among other things, the reform of the Commercial Code as well as that of the Monetary Code and financial.
Why do we speak of an “effective” rate?
When taking out a loan, it is important to distinguish the APR from the nominal rate. The latter is a component of the former.
What is the nominal rate?
The nominal rate, also known as the base rate, represents only part of the cost of credit. It, therefore, does not reflect the real cost of your loan.
The nominal rate as a component of the effective rate:
The TEG is said to be effective because it takes into account all the expenses that you will have to make if your credit request is granted. In short, this is the actual cost of the loan. It should be noted that the TEG is fixed for the duration of the loan repayment.
Why is this a “global” rate?
When loans are granted, they generate for you, the borrower, a set of expenses to be covered.
These charges are classified into 3 categories:
- the basic interest rate,
- the operating costs of your bank (application fees, commissions, various remuneration),
- insurance premiums covering different guarantees.
All of these expenses are included in the TEG, hence the use of the term “global” to describe it.
Regarding insurance, you should know that the bank does not have the right to impose its company on you. You are free to choose it taking care to compare the various proposals. In this case, the insurance premium is not included in the calculation of the TEG. In addition, if you take out a mortgage, the notarial deed costs are not included in the APR.
Why is the rate said to be “annual”?
The APR allows you to calculate the price of your mortgage or your consumer credit over a year’s complête refund. It then suffices to determine the actual cost in proportion to the exact duration of the repayment of the loan (2.5 years for example).