Usury rate: definition, interest and regulations
The usury rate, also known as the usury threshold, is defined by the Ministry of Economy and Finance as “the maximum legal rate that lending institutions are allowed to charge when granting a loan“. The Annual Percentage Rate of Charge (APR) must not exceed the usury rate so that banks can lend money to their customers without them getting into debt at a prohibitive cost. It is therefore a measure that aims to regulate the activity of lending institutions and finance companies in order to protect borrowers against the potential risks of over-indebtedness.
The APR is the annual rate that represents the total cost of the loan. In addition to borrowing interest, it includes all fees related to taking out a loan, such as the nominal rate, bank administration fees, guarantee fees, brokerage fees, as well as the cost of borrower insurance. This APR must be mentioned on any real estate loan offer.
If, however, the APR is higher than the usury rate, the loan is considered usurious, i.e. illegal. According to Article L. 314-6 of the French Consumer Code, “any conventional loan granted at a percentage rate of charge that exceeds, at the time it is granted, by more than one third, the average effective rate charged during the previous quarter by lending institutions and finance companies for operations of the same nature involving similar risks, as defined by the administrative authority after the opinion of the Consultative Committee of the Financial Sector, constitutes a usurious loan“.
In this case, the law considers that an offence has been committed and sanctions it with a fine of €300,000 (Article L341-50 of the French Consumer Code) and/or two years’ imprisonment.
How are usury rates calculated?
The usury rate is calculated on the basis of the “average effective rates charged by lending institutions plus one-third“. The survey of financial institutions used to determine these average effective rates lists individual data on new loans granted during the review period (except for regulated, administered or subsidised loans by the State). These average effective rates result, for each category of loans defined by the decree of 16 June 2016, from the simple arithmetic mean of the observed percentage rates of charge.
The usury threshold is then determined quarterly by the Banque de France and published in the Official Journal at the end of each quarter for the coming quarter according to each type of loan:
- Short-term loans (consumer loans): since the Lagarde Law of 2010, consumer loans are divided into 3 categories depending on the amount borrowed and each of these categories benefits from a specific usury rate.
- Home loans: depending on its term (less than 10 years, from 10 to less than 20 years, 20 years or more), each home loan has a specific usury rate. Variable rate loans and bridging loans have their own usury rate.
- Loans to legal entities that do not have any industrial, commercial, craft, agricultural or non-commercial professional activity: like for individuals, usury rates depend on the term of loans to companies (from 2 years to less than 10 years, between 10 years and less than 20 years, 20 years or more). Variable rate loans with an initial maturity of more than 2 years, overdrafts and other loans of less than two years benefit from their own usury rate.
- Loans to natural persons acting for their professional needs and to legal persons with an industrial, commercial, craft, agricultural or non-commercial activity
Why is this calculation contested?
Since the beginning of the year, lending rates have risen sharply due to the inflationary environment and the war in Ukraine. However, given that usury rates are only revised every three months according to the APRs of property loans, which are often negotiated one to three months before, a scissor effect has been created. For several months now, usury rates no longer reflect the reality of the market and this has affected the borrowing capacity of households, both small and less modest, French residents and non-residents.
In fact, private customers who make use of the asset-based real estate investment company are often treated in banks as legal entities that do not have a commercial or professional activity and are therefore subject to the corresponding usury rate. To circumvent this problem, it may be useful to call on a credit broker for wealth management customers who will propose other types of arrangements by integrating another company (management holding company, for example) into the capital of the real estate investment company in order to circumvent this issue of usury rate.
Similarly, non-residents who are already subject to higher rates due to the more complex understanding of their banking profiles and the risk taken by banking institutions by financing them, are being penalised by this low usury rate.
Usury rates as of 1 July 2022
Home loans
2.60% for the fixed rate of a loan with a term of less than 10 years;
2.60% for the fixed rate of a loan with a term of between 10 years and less than 20 years;
2.57% for the fixed rate of a loan with a term of 20 years or more;
2.45% for variable rate loans;
2.99% for bridging loans.
Loans to legal entities that do not have an industrial, commercial, craft, agricultural or non-commercial professional activity
Fixed-rate loans with a maturity of between 2 years and less than 10 years: 2.75
Fixed-rate loans with a maturity of between 10 years and less than 20 years: 2.83
Fixed-rate loans with a term of 20 years or more: 3.03
