Global Annual Effective Rate

by Sharon Garcia

The overall effective rate of the loan

The overall effective rate of the loan

The global percentage rate (APR) takes into account all the elements of the cost of the loan, in addition to the interest rate, called the borrowing rate: borrower insurance costs (when required), application fees, other additional costs. Even if they are paid in one installment at the beginning of the credit, the fixed costs are divided by the duration of the credit in order to be calculated as a percentage.

For consumer loans and real estate loans, regulated by the Consumer Code, the TEG is referred to as the Annual Effective Rate (APR). The TEG (or APR) calculates the total cost of your credit and compares the offers as a whole, not just by comparing the borrowing rates.

Insurance costs

Insurance costs

In France, death and disability credit insurance, otherwise known as “borrower insurance”, is made compulsory by financial institutions for any real estate credit but not for consumer credit. The higher the amount borrowed and the longer the term, the more this insurance makes sense, as it relieves your heirs of any repayment obligation.

The banks that give you credit at the same time offer the necessary credit insurance. Since the Lagarde reform of 2010, they can no longer require you to take group insurance. You can choose an individual insurance from the company of your choice. However, to be accepted by the bank, the contract must have the same level of collateral or coverage as that of the lending institution.

The law of 17 March 2014 on consumption, known as the “Hamon law”, created a right of substitution of the borrower insurance contract for real estate loans. For offers issued since July 26, 2014, the borrower can change loan insurance, free of charge, during the first 12 months after signing the mortgage offer.

The February 2017 law ratifying the Ordinance on Consumer Credit Agreements replaces this right of substitution with an annual right of cancellation. As of March 1, 2017, borrowers can change borrower insurance each year, provided their credit offer is issued from the date of publication of the law. And from 1 January 2018, this new annual right of cancellation will be applicable to all borrowers with a mortgage loan being refunded, regardless of the date of signature of their mortgage.

The new insurance contract proposed in replacement must offer a level of guarantee equivalent to the group insurance contract.

Other insurance like job loss insurance is optional. Useful in particular for a long-term mortgage, it includes many exclusions of care (waiting periods, non application in case of precarious work situation, employment contract of indefinite duration …). And because of its relatively high cost, this insurance is not retained by the borrowers during the subscription of the loan contract.

Application fee

Application fee

They are withdrawn by the credit institution when the credit is set up. They can be too if your file “does not pass” and your credit is denied. These fees correspond to the cost of analyzing the credit application file. Depending on the types of loans and banks, they may be fixed or proportional to the loan amount. They represent up to 1% of the amount financed.

Ancillary costs

Ancillary costs

They include the costs that the bank incurred on your behalf: tax stamps, registration fees, etc. As a rule, they do not exceed a few tens of USD. In case of purchase of real estate a notary will have to supervise and ratify the real estate transaction. These fees, which are mandatory and substantial (they represent 6 to 7% of the purchase price of an old home), are not credit-related costs and a good part of them are of a fiscal nature (registration fees). See the website of the Notaries of France

TEG and total cost of credit

TEG and total cost of credit

The effective rate of credit is an important element of the cost. Small differences in rates ultimately result in significant changes in the total cost of the loan: 6.5% interest rate instead of 6% on a loan of $ 50,000 borrowed over 10 years represents an additional monthly payment $ 12.64 and an overall additional cost of credit of more than $ 1,500.

The APR is not sufficient to assess the true cost of a revolving credit. It all depends on the rate at which the capital is repaid. The lower the monthly payments, the longer the credit repayment period and the higher the cost of credit. The Lagarde reform of 2010 set a maximum repayment period for the use of revolving loans: 3 years for an amount less than or equal to 3,000 USD, 5 years for an amount greater than 3,000 USD.

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