The basics of the APR: annual percentage rate of charge

There are several interest rates for the same loan. There is the loan rate, the insurance rate ... But the one to look at to know the true cost of a loan is the APR. Details

Disclosure of credit rates can be misleading. When each month, it is proposed an inventory on the rates offered by banking institutions, these figures are true, because they are the bank interests. But they do not reflect the real cost to the borrower. Indeed, while one could imagine that all individuals and professionals could have the same rate, in reality there are as many as there are personal situations. In addition, interest rates are not established in the same way depending on whether it is a question of financing an apartment, a car, studies, household appliances or a need for cash. To find out the total cost of a loan, refer to the annual percentage rate of charge (APR). Note that this cannot be higher than the wear rate established monthly by the Banque de France .

The composition of the annual percentage rate of charge

There are two calculations: one for home loans and the other for consumer loans. For mortgage loans, the APR includes:

  • bank interest applied for a real estate project
  • the borrower's insurance rate from the bank or another provider
  • collateral costs such as mortgage or surety bond
  • the processing fees of the credit institution.

The list is not complete. Indeed, depending on each situation, other costs must be taken into account if the events to which they are associated exist:

  • costs in case of valuation of the property even if they are paid to the real estate agent
  • any costs to remunerate the intervention of an intermediary for the financing file
  • fees imposed to obtain credit, such as those for opening a bank account, life insurance, etc.

In the case of a sale in the future state of completion , the so-called interim interest rates do not enter into the calculation of the annual percentage rate.

For consumer loans, the APR includes:

  • bank interest applied for so-called consumer projects
  • the borrower's insurance rate from the bank or another provider
  • the credit institution's processing fees
  • fees charged to extend credit such as purchasing a credit card or membership in a benefits program
  • any costs to remunerate the intervention of an intermediary for the financing file.

Reading all these elements helps to understand why the competition of offers should not be done on bank interest, the amount of the monthly payment or the repayment period. Of course, these are decisive elements, but the main thing is to compare the proposed APRs. Moreover, credit institutions have the obligation to communicate them in all their communications, in particular on advertisements, prior offers and the final credit agreement.

Case law around the APR

The APR has been the standard for establishing the effective interest rate offered to the borrower since the end of 2016 for mortgage loans and since 2002 for consumer loans. Also, if it is not communicated, the beneficiary of the loan can seize the judge. The latter, depending on the damage suffered, may decide to cancel part or all of the interest.

This process is applied more systematically in the event of an incorrect APR. However, the observed error can only be penalized if it is equal to or greater than one decimal place. This rule has applied since a judgment of the Court of Cassation dated May 18, 2017. This same jurisdiction also decided in a judgment of June 10, 2020 that the repair of an error will no longer be systematically based on the rate of legal interest. Previously, the High Court considered that a credit institution applying an incorrect annual percentage rate of charge lost its right to the interest provided. This decision reinforces the role of the judge and his assessment of the specific situation of each loan.

 

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