TEG (Total Effective Rate) of your credit to better compare

 

It is potentially easy, for a bank or a credit organization, to abuse the credulity of a borrower, for example by promising him the best rate but by charging him, next to it, very high file fees or even exorbitant loan insurance.

In order to give a clear and universal reading grid to all individuals and professionals who wish to borrow a sum of money, the legislator created the concept of “global effective rate”, or TEG, which allows the borrower to view immediately the cost of the entire loan, and therefore compare it more easily to competing offers.

What is TEG?

What is TEG?

The overall effective rate of a loan takes into account not only the interest payable (calculated according to a nominal interest rate), but also all the ancillary and compulsory costs which can easily increase the cost of a loan. The concept of overall effective rate was introduced into French law for the first time by the usury law of December 28, 1966. These provisions, which have hardly changed since with regard to individuals, have been transposed in articles L313- 1 et seq. Of the Consumer Code. The main obligation, for the lender, remains the same: the mention of the TEG is required in any writing evidencing a loan.

Calculation of the TEG

Calculation of the TEG

For example, a loan of $ 10,000 over one year and at a nominal rate of 5% (i.e. $ 500 of interest payable) will have an identical TEG of 5% if no other fees are required from the borrower. If, on the other hand, they are billed administration fees of $ 100, the total cost of the credit increases to $ 600, and the TEG then becomes 6%. This is the reason why the TEG is a much more reliable indicator than the nominal rate for determining the total cost of a loan.

What is the difference between TEG and TAEG?

What is the difference between TEG and TAEG?

Although we still speak, in the usual language, of the TEG, this one was in reality replaced by the APR, Annual Annual Effective Rate, since October 1, 2016. The difference between TEG and APR relates to certain costs which n were, so far, not included. The APR therefore takes into account more ancillary costs than the TEG, in particular disability death insurance or unemployment insurance. The formula for calculating the APR is also more precise by annualizing all of the charges, in contrast to the TEG which is calculated monthly.

What does TEG contain?

What does TEG contain?

As an indicator whose purpose is to aggregate the various costs linked to a loan, the TEG will consist of all or part of the following elements :

  • The nominal rate of credit, that is to say the rate used as a reference for calculating interest, normally constitutes the main cost of credit and therefore the major part of the TEG. If the nominal rate is variable, in the case for example of a revolving loan or a mortgage, the value taken into account for the calculation of the TEG is that of the very first nominal rate, at the beginning of the repayment of the loan. This implies that the TEG of a variable rate loan is never completely reliable, since it is impossible to predict the evolution of the interest payable.
  • For the calculation of the TEG are added, according to the Consumer Code, all “costs, commissions or remuneration of any kind, direct or indirect, including those which are paid or due to intermediaries”. This includes in particular the administrative fees, any brokerage fees and guarantee fees, at least if the amount of these is known at the time of signing the loan.
  • In the case of a mortgage, whether the borrower has purchased insurance from his bank or that he has still exercised his right to delegate loan insurance and has therefore chosen to take out insurance with a third-party organization, the cost of its borrower insurance is integrated into the TEG. In the case of consumer credit, loan insurance being optional, the cost thereof may or may not be included in the TEG.

What are the benefits of TEG?

What are the benefits of TEG?

The benefits of the TEG, or APR, for the borrower are obvious. Except in relatively rare cases where the rate is missing or incorrectly calculated, an individual can rely on this very precise indicator to have a good summary of the total cost of the loan he is considering. Both objective and comprehensive, the TEG constitutes the legal guarantee that the borrower will not be faced with any hidden or unforeseen costs. Universal, it allows you to draw up a comparison between several loan offers very simply and must therefore be a privileged decision-making tool for selecting the best application.

Although the TEG is a primary indicator, it is not recommended to focus only on it. Other elements may legitimately guide your choice among several loan offers with fairly close costs, including in particular the possibility of adapting the monthly payments during repayment (increase, reduction, deferral, etc.), that of benefiting from an early repayment. without penalty, or the type of insurance that retains your preference (fixed or declining premium).

Without forgetting, of course, the quality of the commercial service offered by the bank and the personal efficiency of your advisor!

Which credits are affected by the TEG?

Which credits are affected by the TEG?

The rule is simple: as soon as there is a loan of money to an individual or a professional, the calculation and display of the TEG are two obligations absolutely essential for the lender. It is therefore due as well for a mortgage as for a credit allocated to consumption or even a personal loan. It also obligatorily applies in the event of a bank overdraft on your current account since, again, this is a cash advance granted by your bank.

On the other hand, and since no money is loaned, it logically does not apply to rentals such as leasing, rental with option to purchase (LOA) or even long-term rental (LLD). In this case, it is up to the interested customer to estimate for himself whether the offer made to him is interesting, and therefore to be extra vigilant.

TEG error during a mortgage: what to do?

It is estimated that, in 40 to 50% of cases, the TEG of a credit contract may present an error. Indeed, the calculation method is complex. Following the media coverage of these issues, in particular on home loans, this percentage tends to decrease and the banks are increasingly vigilant when calculating the TEG.

In the event of an error found, the borrower can turn to the courts for damages. However, the wave of protests that appeared between 2010 and 2015 fell sharply.

If the courts were rather favorable to the borrowers at the beginning, the judgments of the last years are much less. Few files thus reached the compensation by the bank.

In addition, some specialized companies offer their services to study the calculation of the TEG and find a flaw: be careful, some have gone bankrupt in recent years, to the detriment of borrowers who had paid fees or started proceedings.

In addition, it is necessary to advance the costs related to the legal proceedings, at the risk of not being reimbursed if the court decision is not in favor of the borrower.

Incorrect, illegal or illegal TEG: how to contest?

Incorrect, illegal or illegal TEG: how to contest?

The complete absence of TEG on a loan contract is the most glaring anomaly, but is very unlikely to arise if you use a bank or a professional credit organization. If however this should happen, you will have a period of five years to challenge the terms of the loan in court, from the date of signature. The lender at fault is liable to a fine of $ 4,500 and, above all, to forfeiture of the right to interest (for consumer credit) or to the automatic substitution of the credit rate by the legal interest rate, which amounted in 2014 to… 0.04%!

An error in the calculation of the TEG constitutes a much more frequent litigation and is contestable under the same conditions, except that the limitation period of five years runs not from the signature, but from the moment when the error was discovered.

Finally, it should be remembered that the overall effective rate of a loan cannot exceed the usury rates, as defined each quarter by the Banque de France. If this were the case, the lender could face a heavy criminal penalty (two years’ imprisonment, a fine of $ 45,000) and the reimbursement of sums wrongly received or their charging against the capital remaining due.

TEG: the most important criterion of a loan… but not the only one!

The TEG is an essential indicator, but it is not recommended to focus only on it.

Other elements may legitimately guide your choice among several loan offers with fairly close costs, including in particular the possibility of adapting the monthly payments during repayment (increase, reduction, deferral, etc.), that of benefiting from an early repayment. without penalty, or the type of insurance that retains your preference (fixed or declining premium).

Without forgetting, of course, the quality of the commercial service offered by the bank and the personal efficiency of your advisor!

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