The beginning of the year usually brings some changes. One of them is the one that came into force on January 1, 2013 and concerns the Consumer Credit Act. It has implemented the European Union requirements set out in Commission Directive 2011/90 / EU of 14 November 2011.
APRC should be counted in the same way.
The purpose of this directive is to set the same way in the European Union countries for calculating the actual annual interest rate for consumer loans. The same way of calculating this indicator is intended to enable consumers to compare offers from lenders in EU member states. This method is based on the adoption of new assumptions to calculate the actual annual interest rate for loan agreements providing for different ways of using the loan.
Until now, depending on the method of using the loan, the costs of credit incurred by the consumer may have been different. The new way of calculating the actual annual interest rate is to change this. Currently, lenders offering loans to consumers, including loans for an indefinite period or repaid in full in recurring periods, should calculate it according to the same assumptions.
The amendment to the Consumer Credit Act specifies these assumptions for:
- renewable loan agreements other than a credit agreement in a current account,
- credit agreements other than credit agreements on a current account and a revolving loan for which it is not possible to determine the date or amount of principal repayment or if the date of conclusion of the contract is not known,
- it also introduces a supplementary assumption regarding situations in which, based on other assumptions, it is not possible to determine the date or amount of payment under a loan.
What is the real annual interest rate?
The actual annual interest rate ( APRC ) is an indicator that should show the relation between the monetary amount that the customer receives from the loan and the costs incurred by him on that account. It enables a meaningful comparison of various loan offers. Relying in this respect only at the nominal interest rate can be misleading. The real interest rate takes into account not only the interest costs, but also other costs that affect the final price of the loan or loans, eg commissions, preparation fees or insurance premiums accompanying the loan. In fact, it is the actual annual interest rate that should show the full cost of the loan.
The Consumer Credit Act contains a definition and method of calculating the APRC, also specifying what costs should be taken into account when calculating this indicator. Importantly, currently every entity offering consumer loans should calculate this indicator in the same way. Applies to lenders such as banks, cooperative savings and credit unions (Credit Unions), loan companies and financial intermediaries.
According to the Act, the actual annual interest rate is the total cost of credit incurred by the consumer, expressed as a percentage of the total loan amount per annum.
The total loan amount is in turn the sum of all cash that the creditor makes available to the consumer under a loan agreement.
The total cost of the loan is, however, all costs that the consumer is obliged to incur in connection with the loan agreement, in particular:
- interest, fees, commissions, taxes and margins, if known to the creditor, and
- costs of additional services where their incurring is necessary to obtain a loan, except for the costs of notarial fees borne by the consumer.
The above calculation is therefore not a closed list and any cost related to the loan (apart from notary fees if it was incurred by the consumer), should be included in the calculation of the total cost of the loan.
The calculation of the APRC is set out in Annex 4 to the Act.
The detailed method of calculating the actual annual interest rate is set out in Annex 4 to the Act on consumer credit. APRC should be calculated in accordance with the mathematical formula included in this annex. When performing these calculations, the creditor should accept the assumptions set out in paragraph 3 and 4 of this annex. The amendment to the Act changed some of them. Here you will find the current text of the Act (Annex 4 to pages 44-46): Act on consumer credit.
The most important additional assumptions specified in this appendix are:
- it is assumed that the total amount of the loan was paid out immediately and in full when the credit agreement gives the consumer the freedom to make withdrawals;
- it is assumed that the loan amount has been paid in the earliest contractual deadline and in accordance with withdrawal limits, if the credit agreement gives the consumer essentially freedom to make payments, but provides for credit or time limits in the case of different withdrawal arrangements;
- it is assumed that the total loan amount is paid using the highest possible fee and loan interest rate applicable to the most common withdrawal mechanisms in a given type of credit agreement if the loan agreement provides for different payment methods using different fees or different interest rates credit;
- in the case of a loan in a savings and settlement account, it is assumed that the total loan amount has been paid in full and for the entire duration of the credit agreement. If the period for which the loan was granted in the savings and settlement account is not known, the calculation of the actual annual interest rate is based on the assumption that the duration of the loan is three months;
- the highest interest rate and the highest fees for the loan over the entire term of the credit agreement shall be adopted if different loan interest rates and different rates are offered for a given period or for a given amount.
When should the consumer be informed about the APR?
APRC should be provided in credit advertisements, before the conclusion of the contract, i.e. at the stage of presenting the credit offer to the consumer, as well as in the contract concluded with such a borrower.
As regards advertising, information on the APRC should be provided by the creditor or credit intermediary in a clear, understandable and visible manner on the basis of a representative example. When determining a representative example, the terms of the consumer credit agreement should be specified, on which the creditor or credit intermediary expects to conclude at least 2/3 of contracts of a given type, taking into account the average loan period, the total loan amount and the frequency of contracts of a given type on the market. The creditor or credit intermediary is required to collect relevant data in order to establish such a representative example.
A creditor or credit intermediary before concluding a consumer credit agreement is obliged to provide the consumer with a series of data, including a real annual interest rate, on a durable medium. More on the subject of the borrower’s rights at this stage I wrote here: Consumer’s rights before concluding a consumer credit agreement.
The actual annual interest rate should be determined, based on the information obtained from the consumer about the credit components preferred by the consumer, in particular as to the duration of the loan agreement and the total loan amount.
If the consumer does not provide this type of information, the creditor or credit intermediary may determine the actual annual interest rate on the basis of a representative example.
When a credit agreement is concluded, the APRC must be included in it. This ratio should be set on the day the consumer credit agreement is concluded, including all assumptions used to calculate it. If the provisions of the credit agreement indicate the possibility of changing the interest rate on the loan and the fees included in the determination of the APRC that can not be determined at the time of determination, the actual annual interest rate is based on the assumption that the borrowing rate and charges will remain unchanged at all times the loan agreement.
In the case of amendments to consumer credit agreements concluded before January 1, 2013, the additional assumptions set forth in Annex No. 4 in their current version, i.e. after the amendment, shall be used to calculate the APRC.
In the remaining scope, the Consumer Credit Act has not been changed, so the consumer credit publications published on the blog in 2012 remain valid.