The APR reflects all the costs of a loan
When individuals apply for a loan from a banking institution, they naturally want to know the proposed interest rate. This is important as it will determine the amount of the monthly payments, while also having an impact on the entire loan structure. The level of the nominal interest rate indeed influences the borrowing capacity and the duration of the loan. However, this is not the only rate to pay attention to when comparing multiple loan offers. The APR, or annual percentage rate, is arguably the most important measure. It allows one to consider the total cost of the credit expressed as an annual percentage of the borrowed amount.
Since October 1, 2016, banks are obligated to disclose the APR to borrowers in place of the total effective rate (TER). The APR includes the proposed interest rate based on the requested loan, as well as other costs related to the establishment and duration of the loan. In other words, this rate takes into account the base interest rate and all the costs related to the loan or those that can be demanded for the implementation of the loan. This includes:
- processing fees;
- borrower insurance premiums when the requested loan concerns real estate and the insurance is taken out through the lending institution;
- any applicable commissions (brokerage fees...);
- any fees for setting up and lifting guarantees (surety, housing credit, mortgage...);
- account setup and maintenance fees when it is a loan condition.
The APR thus allows you to compare the full offers of different banks for the same financing request. Nevertheless, keep in mind that the APR only concerns costs related to the loan. It does not include costs tied to the object of the financing. For example, in the case of a home loan, it does not take into account agency fees or notary fees. Interim interest due in the case of off-plan housing purchases (VEFA in French) is also not included. The same goes for any early repayment penalties.
The particular case of borrower insurance
When comparing the APRs provided by banks for a mortgage, individuals must pay special attention to insurance premiums, as a new legal provision could help them save money. Since September 1, 2022, the enforcement date of the Lemoine Law, they can change insurers at any time without fees.
When comparing APRs, it can therefore be useful to determine the insurance-related costs. In many cases, borrowers can lower the total cost of the loan when changing insurance. Depending on the amount borrowed and the borrower's profile, the Lemoine Law can save between $10,000 and $15,000 on the total cost of a loan.
An offer with a seemingly slightly higher APR may potentially hide a good deal if you plan to make modifications within the first few years of repayment.
How to calculate the APR
To calculate the APR, one must take into account the total borrowed capital, the interest rate proposed by the bank, the duration of the loan, the total cost of insurance in the case of a mortgage, and any additional charges mentioned above. The calculation formula is defined in appendix to the article R314-3 of the Consumer Code. However, the precise approach is quite complex for many borrowers, as it calls upon the concept of discounted cash flows and compound interest. For individuals, it is simpler to use a simulator to calculate APR. You can use the tool developed by the broker MeilleurTaux, whether on the initial capital or the outstanding capital. The result can be valuable when comparing financing offers from different banks, as well as during the renegotiation of a loan or borrower's insurance (calculate your APR here).
The calculation may differ depending on whether the interest rate is fixed or variable. For a fixed APR, the monthly payments will be the same from the beginning to the end of the loan. The shares of the installments dedicated to the repayment of the capital and the payment of the interests will vary over time, without the borrower really noticing. The advantage of fixed rates for the borrower is to have a clear visibility on the amounts that will be debited each month in the long term, whether in the structuring of a property investment or the acquisition of a primary residence.
The APR can also be variable. Here, the monthly payments can increase or decrease according to the variation of a benchmark index such as Euribor (bank refinancing rate). However, this type of rate is still rare for individuals, especially in the context of rising rates. Although this type of loan has a cap, borrowers must anticipate potential fluctuations in order to manage their budget in case of a rise. No matter what type of loan is considered, the annual percentage rate cannot exceed the usury rate.
This maximum rate is set by the Bank of France every 3 months depending on the type of loan and the amount borrowed. For instance, in March 2024, it was 4.72% for mortgages with a fixed rate of less than 10 years or 5,51% for consumer loans where the amount is over 6000 euros. Adhering to this cap is a legal requirement. Thus, credit institutions are prohibited from offering a loan where the APR exceeds this limit.
