Credit always costs more than banks initially advertise. The nominal interest rate reflects only part of the reality. Hence the existence of the Global Effective Rate (Taux Effectif Global – TEG), a cornerstone of banking transparency in French law. This indicator, often unknown to borrowers, nevertheless plays a decisive role in comparing credit offers and can constitute a powerful legal lever in the event of a dispute.

Definition of the TEG: A Statutory Comparator of True Cost

The TEG is not strictly speaking an interest rate, but rather a comparative indicator defined in Articles L.314-1 to L.314-9 of the French Consumer Code (Code de la consommation). Article L.313-4 of the Monetary and Financial Code describes it as « a rate representative of the total cost of credit, expressed as an annual percentage of the amount of credit granted. »

Its primary function: to enable borrowers to objectively compare different credit offers. For consumer credit, it takes the name « Annual Percentage Rate of Charge » (Taux Annuel Effectif Global – TAEG), which is the French equivalent of the EU’s APR.

Calculation Methods According to Credit Type

For Consumer and Mortgage Credit

These credits use the equivalent method, in accordance with Article R.314-1 of the Consumer Code. This method:

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

This method, validated by the Cour de cassation in several recent decisions (Cass. 1st civ., 3 Feb. 2021, No. 19-21.599), generally produces a TEG slightly higher than that obtained by the proportional method.

For Professional Credit

For financing of professional activities, Article L.313-4 of the Monetary and Financial Code requires the proportional method. The TEG is then:

  • An annual rate proportional to the period rate
  • Calculated on an accrued basis
  • Expressed per one hundred monetary units

Elements Included in and Excluded from the TEG Calculation

The TEG incorporates:

  • Contractual interest
  • Arrangement fees (frais de dossier)
  • Various commissions directly linked to the credit
  • Registration and guarantee costs
  • The cost of cooperative shares (parts sociales) required by certain mutual banks (Cass. 1st civ., 24 Apr. 2013, No. 12-14.377)
  • Mandatory insurance premiums

Excluded are:

  • Recoverable VAT
  • Optional insurance premiums
  • Collection and legal fees in the event of default
  • Annual information costs for guarantors (Cass. 1st civ., 15 Oct. 2014, No. 13-19.241)

The TEG for Overdraft Facilities

As a special case, the TEG for overdraft facilities can only be known at the end of each interest period. The banking agreement must therefore state an indicative TEG, calculated on the basis of immediate maximum utilisation.

Bank statements must then indicate the TEG actually applied. Note: the intervention fee (commission d’intervention), often contested, does not generally form part of the TEG calculation as it constitutes a service charge (Cass. com., 8 Jan. 2013, No. 11-15.476).

The TEG in Discounting and Assignment of Receivables

Discounting of Bills of Exchange

For discounting (escompte), the TEG includes:

  • Discount interest
  • The endorsement commission
  • The « hot submission » commission (commission de remise brulante – for bills submitted shortly before maturity)

Article R.314-8 of the Consumer Code authorises calculation on a minimum period of 10 days’ charges.

Assignment of Receivables (Dailly, Factoring)

For « Dailly » assignments (Art. L.313-23 of the Monetary and Financial Code), the following are generally excluded from the TEG:

  • The notification commission, if it is not a condition of the operation
  • The acceptance commission, when acceptance by the assigned debtor is not required

Regarding factoring, the Cour de cassation considers that advances on invoices do fall within the scope of the TEG (Cass. 1st civ., 30 May 2006, No. 03-17.646).

Pitfalls to Avoid

Three main traps threaten borrowers:

  1. Failure to identify mandatory fees that must be included in the TEG
  2. Confusion between the civil year and the so-called « Lombard year » of 360 days
  3. Forgetting the indicative nature of the TEG for variable-rate loans

Verification and Challenge of the TEG

An error affecting the TEG is only actionable when it exceeds one decimal place and is to the borrower’s detriment (Cass. com., 15 Feb. 2023, No. 21-10.950).

To challenge a TEG, the borrower must act before expiry of the 5-year limitation period. This period runs:

  • For professionals: from the date of the contract (Cass. com., 3 Dec. 2013, No. 12-23.976)
  • For individuals: from the day the borrower knew or should have known of the error (Cass. 1st civ., 1 Mar. 2023, No. 22-11.335)

Since Ordinance No. 2019-740 of 17 July 2019, the sole sanction for an erroneous 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 your credit’s TEG? The technical analysis of this rate requires specialist legal and financial expertise. We can examine your file and determine whether legal action has serious prospects of success. Do not wait until the limitation period has expired before acting.

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