The total effective interest rate (TEG), replaced for some loans by the annual percentage rate (TAEG), represents much more than a simple percentage in a loan contract. It expresses in figures the total and real cost of the loan to the borrower. Its determination, which is governed by strict legal and mathematical rules, is an essential element of transparency in the relationship between the lender and its customer. An error in its calculation can have major financial consequences and justify legal action. Understanding its composition and calculation methods is therefore a fundamental step for any borrower wishing to make a commitment in full knowledge of the facts, and a central aspect of the regulation of usury in french law: a complete guide.
Assessment of the usurious rate: general principles
Usury, i.e. lending money at an excessively high rate of interest, is a regulated practice designed to protect borrowers. The usurious nature of the practice is not assessed solely on the basis of the nominal interest rate, but by comparing the actual cost of the credit with legal thresholds. The TEG or TAEG is the reference for this comparison.
The TEG as the real cost of credit: background and objective
The introduction of the overall effective rate by the law of 28 December 1966 marked a break with a limited concept of the cost of credit. Previously, only the cost of money, i.e. the contractual interest rate, was taken into account. This approach masked a significant proportion of the real financial burden borne by the borrower, which was scattered across a multitude of ancillary costs. The legislator's objective was therefore twofold: to inform borrowers and to clean up practices. By making it compulsory to include not only interest, but also all the charges, commissions and remuneration that are a condition of the loan, the TEG aims to provide a comprehensive and transparent view of the cost of the transaction.
The influence of minimal error and case law
Calculating the TEG is a complex operation and the source of many disputes. When faced with calculation errors, the question of their impact has arisen. The Court of Cassation has developed a body of case law which considers that minimal errors, i.e. those where the difference with the actual rate is less than the decimal point prescribed by the regulations (set out in the former article R. 313-1 of the Consumer Code), do not justify the application of a penalty. This position, although pragmatic, is sometimes criticised by judges. They point out that it may validate inaccurate calculations, and that even a tiny difference, in relation to the duration and amount of the loan, is not neutral for the borrower. These court rulings have direct repercussions on the rights of borrowers, particularly with regard to APR errors and forfeiture of contractual interest rights in the panorama of banking law 2025.
The components of the overall effective rate (TEG)
Under article L. 314-1 of the French Consumer Code, the calculation of the TEG must include, in addition to interest, "fees, commissions or remuneration of any kind, whether direct or indirect, including those paid or due to intermediaries involved in any way whatsoever in the granting of the loan". The principle is therefore that of exhaustiveness: any expense that constitutes a condition imposed on the borrower in order to obtain financing must be taken into account.
Interest: basis for calculation and the problems of the banking/cash year
Interest represents the return on the capital lent and forms the core of the APR. A technical but fundamental difficulty lies in the basis on which this annual rate is calculated. For a long time, banks used the 360-day "Lombard" or "bank" year to calculate interest. The effect of this practice is to automatically increase the cost of credit compared with a calculation based on the calendar year (365 or 366 days). The Court of Cassation has ruled clearly that the TEG must be calculated on the basis of the calendar year. For consumer loans and home loans, a clause referring to a 360-day year for calculating the conventional rate is deemed unwritten, resulting in the substitution of the legal interest rate for the conventional rate (Civ. 1re, 19 June 2013).
Value dates: inclusion or exclusion
Value dates are the accounting dates from which a credit or debit transaction earns interest. Manipulating them can artificially increase the duration of the loan and therefore its cost. Case law distinguishes between two situations. If the value dates correspond to real and incompressible technical delays linked to collection operations, they do not have to be included in the calculation of the APR. On the other hand, if they have the effect of unjustifiably delaying the availability of funds or bringing forward repayment, they conceal an increase in the rate and must therefore be taken into account.
Fees and commissions: application, securities, intermediaries, forcing, shares, pre-financing, etc.
The list of charges to be included is long and depends on the specific features of each loan. The guiding principle remains the same: is the fee a condition for granting credit?
Among the most common are :
- Application fees, which cover the cost of researching and arranging the loan.
- The cost of providing security (mortgage, guarantee), where such security is required by the lender.
- Fees and commissions paid to intermediaries, such as credit brokers. This is a particularly sensitive point because the impact of the remuneration of IOBSPs on the calculation of the TEG/TAEG is a frequent source of errors.
- The so-called "forcing" charges, levied for transactions exceeding an authorised overdraft, are considered as remuneration for additional credit and must be included.
- Subscription of shares, if required by a mutual or cooperative bank in order to obtain a loan.
- Pre-financing costs, relating to the period before the funds are fully released. Please note, however, that case law has ruled that interest paid during this phase may not be included if it cannot be determined at the time the contract is signed, particularly in the case of a gradual release of funds.
Insurance premiums: optional or compulsory
The distinction here is crucial. If the lender requires the borrower to take out insurance (for death and disability, for example) as a condition of granting the loan, the full cost of this insurance must be included in the calculation of the TEG. It does not matter whether the borrower chooses the insurance offered by the bank or an external, delegated contract. Conversely, if the insurance is purely optional and the borrower could have obtained the loan without taking out the insurance, the premiums are excluded from the calculation. Whether the insurance is compulsory or optional must be clearly stated in the loan offer.
The penalty clause: exclusion from the calculation of the TEG
The purpose of a penalty clause is to set in advance the amount of damages and interest payable by the borrower in the event of a breach of its obligations, typically a default on repayment. Case law consistently excludes these penalties from the calculation of the TEG. The reason is logical: the penalty clause does not remunerate the credit itself, but punishes contractual non-performance. It is not part of the normal cost of the transaction, but the consequence of a default by the borrower.
Methods for calculating the TEG
In addition to the elements to be included, the mathematical method used for the calculation is also regulated. For a long time there was a controversy between two approaches: the proportional method and the equivalence method.
The proportional method: principle and application
The proportional method is the simplest. To obtain a period rate (for example, monthly), the annual rate is divided by the number of periods in the year (by 12 for a month). In a landmark ruling on 9 January 1985, the Court of Cassation imposed this method for calculating the TEG, rejecting the equivalence method. The latter, although more accurate from an actuarial point of view because it takes compound interest into account, was deemed to be based on a fiction. The decree of 4 September 1985 confirmed this choice, making the proportional method the reference for the majority of loans subject to the TEG, particularly loans to professionals.
Special cases: repayable loan, overdraft, discounting
The regulations provide for adjustments for certain types of credit. For an amortising loan, the calculation must take account of the gradual repayment of the capital, which reduces the interest base over time. For an account overdraft, the TEG is calculated using the "numbers method", which weights each debit balance by its duration in days. Finally, for a discounting transaction, the rate is determined by dividing the total charges (interest, commission) by the nominal amount of the discounted bill.
Annual Percentage Rate (APR): European harmonisation and specific features
The influence of European law led to the introduction of the APR, which now coexists with the TEG and replaces it in certain areas.
Introduction and scope of APR
Resulting from European directives aimed at harmonising consumer information, the APR has become the mandatory reference for consumer credit and home loans granted to individuals. Its main technical feature is that, unlike the TEG, it is calculated using the equivalence method. It is therefore an actuarial rate, which more accurately reflects the cost of the credit by incorporating the capitalisation of interest. Its purpose is to allow reliable comparison of credit offers between different establishments and different countries in the European Union.
Items included and excluded from the total cost of credit
The basis for calculating the APR is defined as the "total cost of credit to the borrower". It largely reproduces the elements that make up the APR. This includes application fees, the cost of compulsory guarantees, intermediary fees and the cost of valuing the property financed. On the other hand, the total cost of borrowing explicitly excludes the costs of acquiring the property, such as notarial fees, as well as any sums owed by the borrower in the event of non-compliance with his or her contractual obligations.
Disputes and verification of TEG/TAEG: the importance of expert advice
The complexity of the rules applicable to TEG and TAEG, both in terms of the elements to be included and the calculation methods, is a major source of disputes. The stakes are high, because the penalty for an error or omission can go as far as cancelling the contractual interest stipulation and replacing it with the statutory interest rate, which is much lower, or forfeiting the right to interest for the lender. Checking the conformity of a TEG or TAEG requires twofold expertise: legal expertise to interpret regulations and case law, and financial expertise to carry out a rigorous mathematical analysis of the contract. If a borrower is in any doubt about the rate applied to their loan, it is in their best interests to call on a lawyer with expertise in this area to assert their rights. An in-depth analysis of the loan contract is often the only way to detect any anomalies and, if necessary, take appropriate action.
If you have any questions about calculating the interest rate on your loan and would like to protect your interests, our firm can provide you with a detailed report. legal advice on credit law to assess your situation.
Sources
- Consumer Code
- Monetary and Financial Code
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