The complexity of calculating the annual percentage rate (APR)

Communicated by a lender to its borrower client upon the conclusion of a loan agreement, the calculation of the Annual Percentage Rate (APR) can have significant implications for the contract.

As a preliminary note, it is important to emphasize that the APR is mandatory for any credit proposal, as it provides the borrower with the most accurate estimate of the annual cost of their loan. This allows the borrower to assess the competitiveness of the financing by comparing the proposals received. The difference between the negotiated rate and the APR reflects all costs associated with the loan arrangement.

This calculation should not be taken lightly, as providing an incorrect APR can lead to serious consequences, including the lender losing their right to interest; a fine of up to €150,000; or a prohibition from operating for up to five years, in accordance with Articles L341-48-1 and L341-49 of the Consumer Code. Beyond the aspect of "liability" in calculating the APR, it is also much more complex than it initially appears, with numerous pitfalls to avoid.

Here are some classic examples of points that warrant particular attention when calculating the APR:

• For a variable rate loan: what assumption should be made for the base rate?
• For a revolving credit: what assumptions should be made regarding drawdowns?
• What amount and what timing?
• The APR must include all costs related to its arrangement and monitoring. But where do the setup activities actually begin? Should provisions for credit monitoring be included? Should costs be spread over the duration of the issuance or applied only at the outset?
• In the case of multiple drawdowns: when should they be incorporated?

In conclusion, it is essential to remember that the calculation of an APR is subject to a specific procedure, and its establishment requires documenting the assumptions made in order to justify them if necessary.