The annual percentage rate of charge (APR) is an indicator that groups together and accounts for all the costs associated with taking out a loan. This interest rate is intrinsically linked to the borrowing conditions that each bank will offer you. Objective, it is intended to represent the total and real cost of the credits.
Legislation on the overall effective rate concerns all financing granted:
- To individuals: consumer credit or mortgage
- To professionals: legal persons (SA, SARL, etc.) and natural persons acting for professional needs (craftsmen, traders, farmers, liberal professions, etc.).
The mention of TEG or TAEG is mandatory. It protects individuals and prevents them from being misled by many misleading advertisements. Thus, for any mortgage loan offer issued from October 1, 2016, your bank must provide you with an annual effective annual rate that you will find in particular in the Fise.
The APR has the advantage of providing a simple indicator that allows you to quickly compare the competitiveness of financing.
The higher the APR, the more expensive your loan will be!
To find out the APR applied by the different financial institutions, we advise you to do an online simulation. Thanks to our comparison, we calculate according to your profile, the type of purchase and its amount, the different APRs applied by the banks. This is the best way to find the offer that best meets your needs.
TEG or TAEG, what differences?
Since October 1, 2016, the TAEG has replaced the TEG. More precisely, the APR is expressed as an annual percentage of the amount of the credit. It is also the reference value making it possible to ensure that the rate of the loan does not exceed the wear rate of the Banque de France.
It is more precise than the Global Effective Rate (TEG) because it includes additional elements in its calculation. Here are the main changes between these two rates:
What is the calculation behind the APR?
The calculation of the APR is complex: it is a question of measuring what will be the total amount of your loan. Unlike the method of calculating the TEG, the APR takes into account insurance costs and European standards. This indicator is a solid negotiating tool with banks since each uses the same formula. The comparison is therefore absolutely objective.
Here is the formula applied to calculate the APR:
APR = [(total amount to be repaid – loan amount)/loan amount] x total number of monthly payments
This method of calculation, therefore, involves the following elements:
- the nominal rate of your loan,
- application fee,
- insurance cost,
- any brokerage fees,
- warranty costs,
- account management fees.
The nominal credit rate
The nominal rate corresponds to the gross rate that the borrower will have to repay in addition to the capital borrowed. Please note that this rate should be taken with a pinch of salt since it does not include the potential effects of inflation (ie the level of prices in the years to come). This value is important because it provides information on the cost of the money that will have to be repaid in exchange for the loan. However, the data alone is insignificant because many other parameters (which we will detail below) will influence the total cost of your credit.
Application fee
The home loan application fee is the remuneration of the bank for having studied and assembled your loan file. Keep in mind that they will only be due if the loan application is accepted. Even if the application fees generally represent a small part of the capital borrowed (between 1 and 1.5% of the capital borrowed), they have a real impact on the APR.
For example, on €100,000 borrowed at 3.5%, €1,000 in administrative fees adds around 0.12% to the APR.
By using a mortgage broker, you will have a good chance of not paying any application fees! As a business provider for the banks, the latter generally has a privileged relationship allowing him to obtain commercial gestures more easily!
home loan insurance
Borrower insurance, which guarantees repayment of credit in the event of death and disability, is compulsory for obtaining credit. Coverage in the event of incapacity or loss of employment is strongly recommended for obtaining credit. The calculation of the APR takes into account the insurance premiums by adding them to the monthly loan payments and re-calculating the corresponding APR.
There are 2 types of loan insurance:
- constant borrower insurance: the amount remains the same over the entire duration of the loan (this is often the case with group insurance, and therefore bank insurance),
- degressive borrower insurance: calculated each month on the outstanding capital (often insurance delegations, therefore independent insurers).
For the same total premium over the entire duration of the loan, degressive insurance will have a slightly greater impact on the TEG because the insurance premiums for the first years are higher than those of insurance with constant premiums. However, at the end of your loan, you will find that declining insurance will have a much lower total cost than constant insurance.
Guarantee or collateral costs
The guarantees (requested by the banks to deal with the risk of non-payment which would not be covered by insurance) constitute a necessary condition for the granting of the loan, their costs are obligatorily taken into account in the calculation of the APR.
It is important to note the two main types of guarantee:
- real sureties: mortgage or registration in the privilege of lender of money, which induce a release (approximately 0.7% for a loan of an amount of €120,000) in the event of resale,
- surety companies: they make it possible to recover at the end of the loan, up to 75% of the premium paid to a mutual guarantee fund: when calculating the APR, the cost of the guarantee can therefore be reduced by almost 75% (because you will recover it at the end of the loan) to arrive at a more “fair” sum.
What costs are not included in the APR?
If the mortgage APR represents a good indication of the total cost of the loan for a first comparison, it does not however include essential elements that the borrower must keep in mind when choosing his loan offer:
Prepayment penalties and fees related to a breach of the credit agreement
In the event of resale of the property before the end of the loan, prepayment indemnities (IRA) will be due to your bank. They are limited by law to 3% of the outstanding capital or to 6 months of interest. If you plan to resell during the loan to buy larger or elsewhere, for example, these penalties will constitute an additional cost that will have to be included in the calculation of your APR.
Finally, the costs related to a breach of the credit agreement corresponding, for example, to add interest if you miss a repayment deadline, or any other cost related to a fault on your part is not taken into account in the calculation of the APR.
Notary fees
Notary fees are not included in the calculation of the APR, because they are acquisition costs independent of the credit transaction itself. They are specific to each notarial study and therefore cannot be a calculation criterion.
What is APR debt interest?
If you have been debited with debit interest, it is because you have negotiated with your banker the setting up of an overdraft authorization on your account.
Debt interest is the interest charged for having lent you exceptionally or permanently, and regardless of its amount, an overdraft authorization at a rate defined by the bank.
In other words, these are agios or bank charges. The bank charges quarterly interest (on January 1, April 1, July 1, and October 1 of the year) because an overdraft authorization is a loan: its borrowing interest rate varies according to the provisions of your banking establishment.
What is the wear rate?
The wear rate is set independently for each type of financing and corresponds to the maximum rate to which financial institutions are subject to set their loans. Calculated quarterly by the Banque de France, it limits excessive differences between the different banking establishments. A loan fixed above the usury rate is said to be usurious and is punishable by law according to article L314-6 of the Consumer Code. If in doubt about compliance with this rate of wear, you can seek advice from a mortgage expert. Be careful, however, to inform yourself before mandating anyone: many fake experts are present on the web.