Definition, method of calculation, operation, obligations... Everything is here! The APR will soon hold no secrets for you. 🤓
What is the APR?
The APR (Annual Percentage Rate) is an essential indicator when it comes to evaluating the actual cost of a loan for the borrower. It is a rate that encompasses not only the nominal rate of the loan but also all the fees and charges associated with the borrowing. Calculated according to a precise formula, the APR allows borrowers to compare different loan offers and make informed decisions. It is often talked about in the context of a rental investment.
Good to know 💡 : Before October 1, 2016, we used to talk about the APR (annual percentage rate). This change was made to provide more clarity and to be able to compare loan options more easily.
How to calculate the APR?
The APR is calculated using the following formula:
→ APR =[(total amount to be repaid - loan amount)/loan amount] x number of installments.
⚠️ the APR cannot exceed the usury rate.*
*The usury rate, also called the threshold of usury, is the maximum rate allowed for granting a loan. It is set using an equation imposed by the European Parliament.
What are the components of the APR?
As previously mentioned, the APR includes all costs related to a loan. So we find:
The nominal rate
The nominal rate corresponds to the rate that the bank will assign to a loan; it varies depending on the situation and the borrower's profile.
The duration of the loan
The duration of the loan is also to be considered when calculating the APR. Good to know 💡: The maximum duration of a loan for a property investment (rental investment or primary residence) is 25 years. However, the duration of a loan for a rental investment is around 20 years.
Cost of insurance
Borrower insurance also represents a cost! The good news? There is a complete article dedicated to this topic. It's right here 👈🏻.
Processing fees
Processing fees are all the administrative costs related to the opening and management of a file.
For an online bank, the processing fees are zero.
For traditional banks, the fees range from €350 to €1000.
For specific cases, the processing fees can go up to 1% of the loan amount.
Guarantee fees or real security:
⚠️ A bank never takes risks! For this, there are several guarantee solutions.
The guarantees are what are called, in more legal language, securities.
In the case where the borrower brings a guarantee:
They can pertain to tangible assets (this is the case with a mortgage) or intangible assets (this is the case with a pledge): this is what we call real securities.
They can also pertain to individuals (this is the case with surety) and in this case, they are personal securities.
In the event that the borrower does not provide collateral:
They can take out a guarantee from a surety organization. These are subsidiaries of large banks that act as guarantors to the banks in case of insolvency.
On average, this represents a charge of 1% of the borrowed amount.
What are the obligations of banks?
Prohibition to adapt their calculation method: the APR is calculated in the same way regardless of the banking institution.
Prohibition to exceed the maximum usury rate
Obligation to indicate the APR in advertisements and loan contracts.
In the event that a bank does not indicate the APR or that the indication is incorrect, a judge may cancel all or part of the interest on this loan. This depends on the damage suffered by the borrower.
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