Interest rates and TEG: understanding the protective rules

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Have you signed a credit contract but the real cost seems opaque? Borrowers are still unfamiliar with the legal protection afforded by interest rates. However, banks have to comply with specific interest rate rules. transparency and information.

Rate transparency: protection against abuse

The regulation of interest rates is part of a strict legal framework. The aim? To protect borrowers from abusive practices and ensure that they understand the financial commitments they have made.

The Consumer Code strictly regulates the information to be provided. A lender who neglects these obligations is liable to severe penalties - up to and including total loss of interest.

The borrowing rate: the basis for credit

Legal definition

Under Article L. 311-1, 8° of the French Consumer Code, the borrowing rate is :

"the interest rate, expressed as a fixed or variable percentage, applied to the capital borrowed or the amount of credit used, on an annual basis.

This rate represents the bank's direct remuneration for the loan granted. It forms the basis for calculating repayments but does not reflect the total cost of the loan.

Fixed or variable

The borrowing rate can be :

• Fixed: constant throughout the term of the contract
• Variable: liable to change according to a reference index

In the case of a variable rate, the contract must specify :

• The benchmark index used
• The conditions for varying the rate
• Adjustment periods

Article L. 312-31 of the French Consumer Code requires the lender to inform the borrower of any change in the borrowing rate before it comes into force. This information must specify the new repayments and the amended duration of the credit.

The Annual Percentage Rate (APR): the true cost of credit

Definition and complex calculation

The TEG, renamed TAEG (Taux Annuel Effectif Global) for consumer credit, represents the real and complete cost of the credit for the borrower.

Defined by Article L. 314-1 of the French Consumer Code, it includes :

• The nominal interest rate
• Miscellaneous expenses
• Commissions
• Compulsory insurance

The calculation follows a complex mathematical formula defined in article R. 314-6 of the Code.

Items to be included in the calculation

According to article R. 314-4, the TEG must include :

1. Application fees
2. Commissions paid to intermediaries
3. Compulsory insurance
4. Account maintenance charges linked to credit
5. For real estate, the cost of valuing the property

I have regularly found that credit institutions have omitted elements when calculating the TEG. For example, the Court of Cassation has ruled that subscriptions to company shares, which are a condition of the loan, must be included in the calculation of the TEG (Cass. 1re civ., 9 Dec. 2010, no. 09-14.977).

Special features for different types of credit

The calculation varies according to the type of credit:

For the bank overdraftsthe TEG is calculated on the basis of the maximum authorised amount. Article R. 314-7 sets out specific terms and conditions.

For the revolving creditThe TEG must appear on each monthly statement and take account of the actual use of the credit.

The usurious rate: imperative legal ceiling

Protection against excess

The usurious rate is a legal ceiling that lenders cannot exceed.

Article L. 314-6 of the French Consumer Code defines it as :

"any conventional loan granted at an overall effective rate which, at the time it is granted, exceeds by more than one third the average effective rate charged during the previous quarter by credit institutions for transactions of the same nature".

These ceiling rates are published quarterly in the Journal Officiel by the Banque de France.

Severe penalties

Usury is a criminal offence punishable by :

• 2 years' imprisonment
• 300,000 fine
• Repayment of sums wrongly received

From a civil point of view, interest in excess of the legal rate is deducted from normal interest and then from the principal.

TEG errors: consequences and developments in case law

Graduated penalties

Penalties vary according to the nature of the credit and the extent of the error:

In the case of consumer credit, Article L. 341-4 of the French Consumer Code provides for forfeiture of interest if the TEG is missing or incorrect. Many courts impose this penalty, sometimes in part depending on the seriousness of the breach.

In the case of other loans, case law has long required the interest clause to be null and void and the legal rate to be substituted for the contractual rate.

Recent developments in case law

The Court of Cassation made a major turnaround with its ruling of 10 June 2020 (no. 18-24.287), confirmed by the ruling of 24 March 2021 (no. 19-14.404).

From now on, in the event of an error in the TEG, the penalty is no longer systematically the nullity of the interest clause, but the total or partial forfeiture of the right to interest, "in the proportion determined by the court, having regard in particular to the loss suffered by the borrower"..

Order no. 2019-740 of 17 July 2019 endorsed this more proportionate approach.

On 21 October 2020 (no. 19-18.971), the Court of Cassation ruled that "the onus is on the lender to prove that it has fulfilled its pre-contractual obligations".. Simply signing the contract is not enough to prove that the customer has been properly informed.

Another essential point is that the interest calculation year must be 365 days. The use of a "lombard" year of 360 days is penalised when it generates an additional cost greater than the decimal provided for in article R. 313-1 of the Consumer Code (Cass. 1re civ., 27 Nov. 2019, no. 18-19.097).

Clients regularly come to our firm with contracts containing anomalies in the calculation of the TEG. Systematically checking this rate is often a source of significant savings for the borrower.

A word of advice? Always check the APR calculation on your loans. If in doubt, don't hesitate to visit. The firm offers a full analysis of your credit agreements to identify any irregularities and help you defend your rights.

Sources

• Consumer Code: articles L. 311-1, L. 312-31, L. 314-1, L. 314-6, R. 314-4, R. 314-6, R. 314-7
• Cass. 1st civ., 9 Dec. 2010, no. 09-14.977
• Cass. 1st civ., 10 June 2020, no. 18-24.287
• Cass. com., 24 March 2021, no. 19-14.404
• Cass. 1st civ., 21 Oct. 2020, no. 19-18.971
• Cass. 1st civ., 27 Nov. 2019, no. 18-19.097
• Order no. 2019-740 of 17 July 2019 on civil penalties applicable in the event of failure or error in the overall effective rate

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