Taking out a loan is a frequent stage in the life of a business or an individual. But every loan has a cost: the lender's remuneration. Far from being left to the discretion of the banks, this remuneration is governed by a set of complex legal rules designed to protect the borrower. This article provides an overview of the fundamental concepts governing the cost of credit, from the fixing of contractual interest to the Total Effective Rate (TEG), and including the prohibition on usury. Each subject, which is deliberately dealt with in summary form here, is the subject of a more detailed analysis in our dedicated articles. Our firm offers a legal expertise in banking and financial law to guide you through these mechanisms.
Contractual interest: principles and fixing procedures
Interest is the "rent" on the money lent. It is the lender's main remuneration for the service rendered and the risk incurred. Although interest-bearing loans were long prohibited under French law for moral and religious reasons, their legality is now a firmly established principle. The parties to a loan contract are free to agree interest, but this freedom is subject to formal requirements and substantive limits.
Legality and principle of remuneration
The validity of the stipulation of interest has been accepted since the French Revolution. The Civil Code even provides that the lending of money is, by its very nature, a contract for consideration. This development enshrined the lender's right to be remunerated, although free credit remains a possibility, particularly in the context of specific commercial transactions. The principle is therefore that the lender is free to charge interest, provided that certain rules are complied with, in particular the requirement for the agreement to be in writing and the prohibition of usury.
How the rate is determined
Interest rates can be fixed in several ways, each with different consequences for the borrower. A fixed rate, as the name suggests, remains constant for the entire term of the loan, making repayments perfectly predictable. Conversely, the variable (or revisable) rate fluctuates according to a benchmark index, such as Euribor. This variability can be advantageous if rates fall, but exposes the borrower to the risk of a rise. To find out more about the risks and protection associated with variable rate or foreign currency loansSee our detailed article. Other practices, such as anatocism (capitalisation of interest) or the use of the Lombard year for calculatingare also strictly regulated.
The Total Effective Interest Rate (TEG/TAEG): the real, transparent cost of credit
The nominal interest rate reflects only part of the cost of a loan. To enable borrowers to assess the real financial cost of their commitment, the law requires a summary indicator to be quoted: the Annual Percentage Rate (APR), or Taux Effectif Global (TEG) for consumer and property loans. This is the ultimate transparency tool.
Definition and use of TEG/TAEG
The TEG has a dual function. Firstly, it ensures that borrowers are fully and honestly informed by aggregating all the costs associated with granting credit into a single percentage rate. This makes it possible to compare offers from different institutions objectively. What's more, it is this rate that serves as the reference for checking whether a loan exceeds the usury threshold. Its accuracy is therefore essential.
Components and calculation of TEG/TAEG
The basis for calculating the TEG is broad. It includes not only conventional interest, but also all charges, commissions and remuneration of any kind that are a condition for obtaining credit. These include, for example, application fees, borrower's insurance premiums imposed by the bank, guarantee fees and the cost of subscribing to shares in mutual banks. Omission or error in the inclusion of any of these elements may render the TEG inaccurate and give rise to penalties. For a full analysis of methods for calculating TEG/TAEG and applicable penaltiesOur dedicated article will give you all the details you need.
The prohibition of usury rates: a limit on contractual freedom
The freedom to set interest rates is not absolute. French law provides strong protection against excessive interest rates by prohibiting usury. A loan is considered usurious when its TEG/TAEG exceeds a certain ceiling, known as the "usury rate" or "usury threshold".
Definition and development of wear
A usurious loan is a loan granted at a rate that is more than one third higher than the average effective rate charged by credit institutions for similar transactions during the previous quarter. These average rates are calculated and published each quarter by the Banque de France for different categories of loans (mortgages, consumer loans by amount, etc.). The scope of this prohibition has changed: while it mainly protects private individuals, certain credit transactions for professionals, such as overdrafts, remain subject to it.
Penalties for loansharking
There are severe penalties for exceeding the usury rate. In civil law, any interest overpaid must be returned to the borrower and deducted from the outstanding capital. In criminal terms, granting a usurious loan is an offence punishable by imprisonment and a heavy fine. These penalties are designed to deter lenders from charging abusive rates. The subtleties of definition and penalties for loan-sharking are explored in detail in our article on the subject.
A constantly evolving legal framework to protect borrowers
The regulation of lender remuneration is a technical area that is constantly evolving under the influence of case law. The rules relating to the TEG, in particular, have generated a great deal of litigation, prompting the legislator and the courts to specify and sometimes modify the applicable penalties. Whether it's a question of verifying the validity of an interest clause, the accuracy of a TEG or the potentially usurious nature of a loan, analysis requires a precise knowledge of the texts and their interpretation. An error in a loan offer can have significant financial consequences for both the lender and the borrower.
Analysing a credit agreement and its financial conditions is a complex exercise. If you have any doubts about the compliance of your loan, or if you want to secure your future financing operations, contact our law firm for an in-depth examination of your situation.
Frequently asked questions
What is the difference between the nominal rate and the TEG/TAEG?
The nominal rate (or borrowing rate) represents only the bank's remuneration, i.e. the interest on the loan. The TEG/TAEG is much broader: it includes the nominal rate as well as all the other compulsory charges linked to the credit (application fees, insurance, guarantees, etc.), giving a complete picture of the total cost.
Is an interest-free loan possible in France?
Yes, free credit is perfectly legal. It is often used in a commercial context for payments in several instalments without charge, where the seller bears the cost of the credit. Loans between private individuals can also be interest-free.
What happens if my loan is deemed usurious?
If a court finds that a loan is usurious, the sums received by the lender in excess of the capital borrowed are considered excessive. These sums must be returned to the borrower, generally by deducting them from the capital still to be repaid. Criminal penalties may also be imposed on the lender.
Are all costs included in the calculation of the APR?
No, only charges that are a condition for obtaining the credit or for obtaining it on the stated terms should be included. For example, penalties for early repayment or charges for breach of contract are not taken into account in the initial calculation of the APR.
Can I dispute an incorrect TEG several years after signing my loan?
Yes, it is possible, but the action is subject to a limitation period of five years. The starting point for this period is a complex issue: it runs from the day when the borrower knew or should have known of the error, which depends on the nature of the error and whether the borrower is a professional or a consumer.
Can my bank change the interest rate on my loan?
If you have a fixed-rate loan, the rate cannot be changed unilaterally. In the case of a variable-rate loan, the rate changes in accordance with the terms of the contract, which must be based on an objective index that is beyond the sole control of the banker.
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