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Consumers (08-05-2012)

Guidelines on the Application of the Consumer Credit Directive in Relation to Costs and the Annual Percentage Rate of charge

When it comes to consumer credit consumers need the right information in order to make informed choices. The EU Consumer Credit Directive1 aims to ensure that consumers get the information they need.

Consumer credit is not always easy to understand; it is therefore very important that creditors provide consumers with the correct and necessary information. Since the Consumer Credit Directive now in force is relatively new, creditors may have some difficulty working out how to apply this legislation to their particular products, and consumers may have difficulty understanding the information provided.

If European legislation on consumer credits is incorrectly applied, consumers may miss out on the cheapest credit deals and they may not correctly calculate the real cost of the credit, thereby inducing the risk of insolvency and indebtedness which is a common problem. The downside for creditors is that it is not clear who is the market leader offering the best conditions - and this is a lost opportunity.

A key element of the Consumer Credit legislation2 is an obligation by creditors to provide the Annual Percentage Rate of charge (APR) so that consumers can not only compare offers easily, but also, work out exactly how much the credit will cost including all elements. Consumers do not always pay attention to the different elements such as charges which come on top of borrowing rate, and which can make the total cost much higher.

To help Member States to correctly apply the Consumer Credit Directive, the Commission published on 7 May 2012 Guidelines on the application of the Directive 2008/48/EC in relation to costs and the Annual Percentage Rate of charge. The Guidelines provide comprehensive explanations how to delineate the total cost of credit, in particular to be included in the calculation of APR, and how to apply assumptions as amended by the Directive 2011/90/EU.

In order to help creditors to provide comprehensive information to consumers (total costs of credit and APR), the European Commission has prepared a set of Guidelines which they publish today.

The Guidelines clearly indicate how to determine the total cost of credit and explain how to calculate the Annual Percentage Rate of charge. A harmonised approach will contribute to fair competition between creditors which will in turn benefit consumers. Furthermore, consumers will be more confident that they receive reliable information and they will be more willing to use it to take informed and responsible credit decisions.

1 Directive2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers, OJ L133 of 22.05.2008
The Consumer Credit Directive was recently amended by Commission Directive 2011/90/EU of 14 November 2011 amending Part II of Annex I to Directive 2008/48/EC, OJ L296 of 15.11.2011