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The Taux Effectif Global (TEG), and its equivalent for consumer credit, the Taux Annuel Effectif Global (TAEG), represent much more than a simple percentage on a loan contract. It is the key indicator of the real cost of your finance, a central concept in the the lender's remuneration. This tool, required by law, has been designed to enable you to compare credit offers in complete transparency and to protect you against abusive practices. However, its calculation is complex and mistakes are common, leading to sometimes heavy penalties for credit institutions. Understanding how it works is therefore essential for all borrowers, whether individuals or company directors.
Understanding TEG and TAEG: definition and fundamental role
The Taux Effectif Global, or TEG, has a clear mission: to provide a complete overview of the cost of a loan. For consumer credit, it is known as the Annual Percentage Rate (APR), but the principle remains the same. Unlike the nominal interest rate, which represents only the bank's remuneration for the funds lent, the APR includes all the compulsory costs associated with obtaining the finance. Its purpose is threefold.
Firstly, it provides transparent information for the borrower. By aggregating all the costs, it reveals the true price of the loan, expressed as an annual percentage of the capital borrowed. Secondly, it becomes a reliable comparison tool. Two loan offers with the same nominal rate can have very different TEGs, depending on the additional costs charged by each institution. The TEG therefore makes it possible to compare bank offers objectively. Finally, it acts as a safeguard against usury. It is the TEG that is compared with the usury rate, the maximum legal threshold above which a loan is considered to be abusive.
The TEG/TAEG base: what costs are included?
La determining the costs to be included in the APR base is a major source of disputes. The rule is simple in principle: any sum that is a condition of the loan must be included. The lender cannot exclude a cost on the grounds that it is paid to a third party, since the borrower is required to pay it in order to obtain the loan on the stated terms. In addition to these direct costs, the calculation of the TEG may be affected by more complex and sometimes long-standing banking practices, such as the Lombard year or value dateswhich may conceal additional costs.
Fees and commissions: all costs
Article L. 314-1 of the French Consumer Code is explicit: "fees, taxes, commissions or remuneration of any kind, direct or indirect" must be included. This covers a wide range of charges. Application fees, which pay for researching and arranging the finance, are systematically included. Also included are brokerage fees, if the use of an intermediary has been imposed or recommended by the bank, and tax charges such as registration fees.
Case law has gradually extended this list. For example, if a loan is conditional on the opening of a specific account, the costs of maintaining this account must be taken into account. Similarly, interim interest, i.e. interest accruing between the release of funds and the start of actual repayment, must be included in the basis of assessment of the TEG if it is known and determinable at the time the contract is signed.
Insurance and guarantees: a cost not to be underestimated
There is a strict logic to the inclusion of insurance and guarantees in the calculation of the TEG. The cost of death and disability insurance (DTI), which is very common in home loans, must be included if taking out such insurance is a condition of the bank granting the loan. If the borrower is free not to take out insurance, or if the lender does not require it, its cost can be excluded. The analysis is the same for fire insurance for the property financed: if it is required by the loan agreement, its cost must be included.
The costs of guarantees are also included. Whether it's a mortgage, a lender's lien or a guarantee from a specialised organisation (such as Crédit Logement), the costs of putting these guarantees in place must be included in the calculation of the APR. The same applies to the cost of subscribing to a mutual guarantee fund, which is often required by mutual banks as a condition of granting a loan.
Specific features of overdrafts and discounting transactions
For certain types of business credit, specific fees must be included. In the case of a current account overdraft, the "highest overdraft commission", calculated on the peak debit of the month, must be taken into account. The same applies to commitment fees or forcing fees, charged when the overdraft authorisation is exceeded.
In the case of bill discounting, the endorsement or acceptance fee, which remunerates the bank for the service and risk it has taken on, is a component of the cost of credit. It must therefore be included in the calculation of the APR. On the other hand, a commission that remunerates a service independent of the credit, such as simple collection management, may be excluded.
Methods for calculating TEG/TAEG: proportional vs. equivalent
Determining the costs to be included is only the first step. You also need to convert them into an annual rate. Historically, two calculation methods are opposed, with significantly different results: the proportional method and the equivalent method. The choice between the two depends on the nature of the loan.
The proportional method
The proportional method is the simplest. It involves calculating the rate for a given period (for example, a month) and multiplying it by the number of periods in a year (twelve, for a monthly rate). This calculation, although straightforward, does not reflect the effect of compound interest and tends to underestimate the real cost of credit on an annual basis. For a long time, this was the reference method in French law. Today, its use is restricted to loans intended to finance a professional activity and loans granted to legal entities governed by public law.
The equivalent (actuarial) method
Spurred on by European law, the equivalent method, also known as the actuarial method, has become the norm for consumer loans (consumer credit and mortgages). This more scientific method is based on the principle of compound interest. It takes into account the fact that the interest paid periodically is no longer available to the borrower. The resulting APR is mathematically more accurate and therefore always slightly higher than the rate calculated by the proportional method. It is this method that ensures genuine comparability of credit offers at European level.
The obligation to state the TEG/TAEG in writing: form and scope
The requirement for written reference to the TEG or TAEG is a condition of validity of the interest stipulation. The absence or inaccuracy of such a clause carries severe penalties. This obligation applies to all types of credit, whether granted to professionals or private individuals, and whatever their form (private agreement or notarised deed). The stakes are high, because even the smallest error can result in severe penalties for the lender. This is an area where the intervention of a law firm specialising in banking law is often decisive.
The general requirement for the written word
The law requires the TEG to be mentioned "in any writing evidencing a loan agreement". This phrase has a very broad scope. It applies to the loan offer, the final contract and any document setting out the essential features of the loan. A simple indication of the various cost elements is not enough: the final aggregate rate must be clearly stated. Disclosure of the period rate and the duration of the period (for example, a monthly rate for a period of one month) is also compulsory for business loans calculated using the proportional method.
Specific cases: overdrafts and variable rates
For loans where the cost cannot be known with certainty in advance, case law has had to adapt the requirements. This is the case for overdrafts. The Court of Cassation has imposed a twofold disclosure requirement: prior disclosure, when the credit is opened, with an indicative APR calculated on the basis of examples with figures, and subsequent disclosure, on each account statement, indicating the APR actually applied over the past period.
For variable-rate loans, the solution has evolved. Initially, periodic information on the new TEG was required, but case law has softened its stance. Henceforth, if the variation in the rate is linked to an objective index outside the control of the lender (such as Euribor), and the terms of this variation are clearly described in the initial contract, the bank is no longer obliged to recalculate and communicate the TEG each time the rate changes.
Penalties for errors or omissions in the TEG/TAEG: the 2019 jurisprudential turnaround
For a long time, the penalty for an erroneous TEG was the nullity of the contractual interest stipulation and its replacement by the legal interest rate, which was often much lower. This very severe penalty has given rise to a great deal of litigation. A 2019 ordinance, the principles of which were validated by the Cour de cassation for earlier contracts, has profoundly changed the landscape. An erroneous TEG can also have another major consequence: the loan can be classified as a usurious loanif the recalculated rate exceeds the legal threshold.
Forfeiture of interest: a proportionate sanction
From now on, the sole and general penalty for any type of credit is forfeiture of the right to interest for the lender. However, this forfeiture is no longer automatic or total. The judge has discretionary powers. It must determine the proportion of the forfeiture (partial or total) "with particular regard to the loss suffered by the borrower".
This new approach puts an end to the automatic nature of the penalty. The borrower must demonstrate not only the error, but also the damage that this error has caused him or her. A minor error that has had little financial impact will probably not be punished by a total forfeiture. The judge will take into account the seriousness of the bank's failure and the practical consequences for the borrower.
The starting point of the limitation period for an action for nullity
An action for nullity of an interest stipulation on the grounds of an error in the TEG is subject to a limitation period of five years. The starting point of this period is a strategic issue. Case law makes a fundamental distinction.
For a professional borrower, the period runs from the date the loan contract is signed. The law considers that a professional is competent to analyse the document he or she signs and detect any errors. For a non-professional borrower (a consumer), the starting point is more protective. The period only begins to run from the day on which the borrower knew or should have known of the error. This knowledge may be revealed by a statement of account, a financial analysis or an expert's report, which may postpone the starting point of the action for several years after the loan was taken out.
The complexity of the rules governing TEG and TAEG means that constant vigilance is required, both for the borrower who takes out the credit and for the lender who draws it up. An erroneous statement or omission can have significant financial consequences and justify legal action. For an in-depth analysis of your loan agreement and to assess whether it is appropriate to challenge it, contact our team of lawyers.
Sources
- Consumer Code
- Monetary and Financial Code
- Civil Code
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