The Total Effective Rate (TEG): definition and calculation methods

Credit always costs more than the banks say it will. The nominal interest rate only reflects part of the reality. Hence the existence of the Annual Percentage Rate (APR)This is the cornerstone of banking transparency. This indicator, which is often overlooked by borrowers, plays a decisive role in comparing credit offers and can provide powerful legal leverage in the event of a dispute.

Definition of TEG: a legal comparison of real costs

The TEG is not strictly speaking an interest rate, but a comparative indicator defined in articles L.314-1 to L.314-9 of the French Consumer Code. Article L.313-4 of the Monetary and Financial Code describes it as "a rate representing the total cost of credit, expressed as an annual percentage of the amount of credit granted".

Its main function is to enable borrowers to compare different credit offers objectively. For consumer credit, it is known as the Annual Percentage Rate (APR).

Calculation methods by type of credit

For consumer credit and home loans

These loans use the equivalent method, in accordance with article R.314-1 of the French Consumer Code. This method:

• Calculates the rate actuarially using the principle of compound interest
• Ensures equality between the sums lent and all payments due by the borrower
• Based on a calendar year (365 or 366 days)
• Uses a standard month of 30.41666 days

This method, validated by the Court of Cassation in several recent rulings (Cass. 1re civ., 3 Feb. 2021, no. 19-21.599), generally gives a slightly higher TEG than that obtained using the proportional method.

For business loans

For business financing, article L.313-4 of the French Monetary and Financial Code requires the proportional method. The TEG is then:

• An annual rate proportional to the period rate
• Calculated in arrears
• Expressed in hundred currency units

Items included and excluded in the calculation of the TEG

The TEG includes, for a detailed analysis of its components:

• Contractual interest
• Application fees
• Various commissions directly linked to the loan
• Registration fees and guarantees
• The cost of shares imposed by certain cooperative banks (Cass. 1re civ., 24 Apr. 2013, no. 12-14.377)
• Compulsory insurance premiums

Not included:

• Recoverable VAT
• Optional insurance premiums
• Costs of reminders and procedures in the event of incidents
• The cost of providing annual information to guarantors (Cass. 1re civ., 15 Oct. 2014, no. 13-19.241)

The TEG for account overdrafts

In a special case, the TEG for account overdrafts can only be known at the end of each interest period. The banking agreement must therefore indicate an indicative TEGcalculated for maximum immediate use.

The bank statements must then show the TEG actually applied. Please note: the intervention fee, which is often disputed, is not generally included in the calculation of the APR because it is a service fee (Cass. com., 8 Jan. 2013, no. 11-15.476).

The TEG for discounting and assignment of receivables

Discounting of commercial paper

For discounting, the TEG includes:

• Discount interest
• Endorsement commission
• The "hot handover" commission (for items handed in shortly before the due date)

Article R.314-8 of the French Consumer Code authorises the calculation of agios over a minimum period of 10 days.

Assignment of receivables (Dailly, factoring)

For "Dailly" assignments (art. L.313-23 of the French Monetary and Financial Code), the TEG is generally excluded:

• The notification fee if this is not a condition of the transaction
• The acceptance commission when the acceptance of the assigned debtor is not required

With regard to factoring, the Court of Cassation considers that advances on invoices fall within the scope of the TEG (Cass. 1re civ., 30 May 2006, no. 03-17.646).

Pitfalls to avoid

There are three main pitfalls for borrowers:

1. Failure to identify mandatory charges to be included in the APR
2. Confusion between the calendar year and the 360-day "Lombard" year
3. Forgetting the indicative nature of the TEG for variable-rate loans

Checking and disputing the TEG

An error in the TEG is only punishable where it is greater than one decimal place and is to the detriment of the borrower (Cass. com., 15 Feb. 2023, no. 21-10.950).

To dispute a TEG, the borrower must take action before the 5-year limitation period expires. This period runs:

• For professionals: from the date of the contract (Cass. com., 3 Dec. 2013, no. 12-23.976).
• For individuals: from the date on which the borrower knew or should have known of the error (Cass. 1re civ., 1 March 2023, no. 22-11.335).

Since Ordinance no. 2019-740 of 17 July 2019, the one-off penalty for an incorrect TEG is the forfeiture of the lender's right to interest "in the proportion determined by the court, having regard in particular to the prejudice suffered by the borrower".

Do you suspect an error in the calculation of the APR on your loan? Technical analysis of this rate requires advanced legal and financial skills. We can examine your case and determine whether legal action has a serious chance of success. Don't wait until the end of the limitation period to take action.

Sources

• Articles L.314-1 to L.314-9 of the Consumer Code
• Article L.313-4 of the Monetary and Financial Code
• Article R.314-1 of the French Consumer Code (calculation of APR)
• Article R.314-5 of the Consumer Code (exclusions)
• Article R.314-8 of the French Consumer Code (discount)
• Cass. 1re civ., 24 Apr. 2013, no. 12-14.377 (company shares)
• Cass. 1re civ., 15 Oct. 2014, no. 13-19.241 (guarantee information costs)
• Cass. com. 8 Jan. 2013, no. 11-15.476 (intervention fee)
• Cass. 1re civ., 30 May 2006, no. 03-17.646 (factoring)
• Cass. com., 15 Feb. 2023, no. 21-10.950 (TEG error)
• Cass. com. 3 Dec. 2013, no. 12-23.976 (professional prescription)
• Cass. 1re civ., 1 March 2023, no. 22-11.335 (individual prescription)
• Order no. 2019-740 of 17 July 2019 (penalties)
• Cass. 1re civ., 3 Feb. 2021, no. 19-21.599 (standard month)