COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, l2.U4.iyyo 
COM(96) 79 final 
96/0055 (COD) 
Report on the Operation of Directive 90/88 
Proposal for a 
EUROPEAN PARLIAMENT AND COUNCIL DIRECTIVE 
amending Directives 87/102 (as amended by Directive 90/88) for the 
approximation of the laws, regulations and administrative provisions of the 
Member States concerning consumer credit 
(presented by the Commission) 

I. Introduction and Summary » 1 
II The mathematical formula in Directive 90/88/EEC 5 
1. Simple interest rate calculation 6 
2. Yearly Compounded Interest 7 
3. The 1 year compounding period: 8 
4. The EC formula 10 
a) Present Value 11 
b) Summing up different calculations: the E symbol 11 
III The calculation of the Annual Percentage Rate of Charge in the EC 
and the other members of the EEA 13 
1. General Observations 13 
a) Interest and the Annual Percentage Rate of Charge 13 
b) Verbal Definitions of the Annual Percentage Rate 
of Charge 14 
2. The Application of the EC formula 15 
3. The calculation of the Annual Percentage Rate of Charge 
in Germany and France 17 
a) The German method 17 
b) The French method 19 
c) Comparison of the EC formula and the 
German and French methods 21 
4. Arguments in favour of the EC formula 23 
IV. Elements of Cost to be included in the calculation 25 
a) Elements of Cost 25 
b) Situation in the Member States 25 
V. Other issues 32 
1. The Denomination of the Annual Percentage Rate of Charge 32 
2. Accuracy 35 
3. Time definitions 36 
VI. Conclusions and Recommendations 38 
Annexes: 
I Articles 1 and 1a of Directive 87/102 (as amended by Directive 90/88)40 
II National legislation transposing Directive 90/88 42 
III The different formulae in use (German, French, Finnish) 47 
/fn 
I. Introduction and Summary 
1. On 22 February 1990, the Council adopted Directive 90/88 amending 
Directive 87/102 "for the approximation of the laws, regulations and 
administrative provisions of the Member States concerning consumer credit". 
This Directive entered into force on 31 December 1992. 
2. Pursuant to Article 1a5b of the amended Directive, the Commission must: 
"submit to the Council a report, accompanied by a proposal, which will 
make it possible in the light of experience, to apply a single Community 
mathematical formula for calculating the annual percentage rate of 
charge". 
Pursuant to Article 1a(5)(c), the Council shall "acting by a qualified majority on 
the basis of the proposal from the Commission, take a decision before 1 January 
1996". 
Background1 
3. The first Consumer Credit Directive, Directive 87/102/EEC for the 
approximation of the laws, regulations and administrative provisions of the 
Member States concerning consumer credit2, introduced the principle that a 
uniform method should be established for the calculation of the "annual 
percentage rate of charge". Although the principle was established, the method 
was left open. Following discussions with government experts, the Commission 
presented a proposal for a Directive3, later amended4, to regulate not only the 
mathematical aspect but also the elements to be included in the calculation. 
Directive 90/88 was adopted by the Council on 22 February 1990. The Directive 
introduced a Community method of calculating the "annual percentage rate of 
charge" for consumer credit and defined the credit cost items to be used in the 
calculation by indicating those costs which were not to be taken into account5. 
4. All Member States were to ensure, at least, that only one mathematical 
formula for the calculation of the "annual percentage rate of charge" was in use 
in their territory. For a transitional period until 1 January 1996, those Member 
States which used a different mathematical formula for the calculation of the 
"annual percentage rate of charge" (prior to 1 March 1990) were permitted to 
continue to do so. 
4 For further detail on the background to Directives 87/102 and 90/88, see Chapter 2 of 
the Report on the application of Directive 87/102: COM(95)117 of 11.05.95 
OJ L 42 of 12.2.87, p. 48 
OJ C 155 14.6.88 p.10 
OJ C 155 23.06.89 p. 4 
Recital 3, Directive 90/88 
5. Directive 90/83 was incorporated into the Agreement on the European 
Economic Area (EEA) and this Report therefore covers Iceland, Liechtenstein 
and Norway as well as the 15 members of the European Union. 
6. Pursuant to the obligation in Article 1a(5)(b) on the Commission to present 
to the Council "a Report, accompanied by a proposal" which will make it possible 
to definitely apply a single Community mathematical formula for calculating the 
"annual percentage rate of charge", the Commision hired a consultant expert in 
financial mathematics to carry out a study of the application of Directive 90/88 in 
the Member States of the European Community and other members of the EEA6. 
Meetings and contacts with government experts also took place between April 
1995 and January 1996. On the basis of the results of the above study, other 
studies of the transposition of the Directive into domestic law7, and particularly 
the results of contacts with governmental experts, the Commission presents the 
present Report which is accompanied by a proposal for a Directive8 which will 
"make it possible, in the light of experience, to apply a single 
Community mathematical formula for calculating the annual 
percentage rate of charge". 
7. While the Directive requires an evaluation and a report which "...will make 
it possible, in the light of experience, to apply a single Community mathematical 
formula...", this requires an examination of other issues than the mathematical 
formula alone, in order to define a uniform application of the formula. 
Conclusions of the Report9 
8. Transposition of the Directive has been completed in the majority of 
Member States of the European Community and other members of the EEA. The 
formula contained in Annex II of the Directive is presently in use in all Member 
States of the European Community and other members of the EEA, with the 
exception of Germany, France10 and Finland. 
9 
10 Study of the method of calculation of APR in EEA States, Contract A0 2600/94/000101. 
Available at DG XXIV. 
See footnote 3 of COM(95)117, Report on the operation of Directive 87/102/EEC on the 
approximation of the laws, regulations and administrative provisions of the Member 
States concerning consumer credit 
While the term 'Decision' is used in Article 1a5c, this is not a 'Decision' as defined by 
Article 189 of the Treaty but rather, since its objective would be to require Member States 
to change their laws, a Directive. This is further explained in the Explanatory 
Memorandum which accompanies the proposal for a Directive. 
Chapter VI infra 
See Annex II of this document 
9. Concerning the verbal definition of the "annual percentage rate of charge" 
(APR), some linguistic amendments are required to the English and Greek 
language versions of Article 1a(1)(a). 
10. Although following the transposition of the Directive by the Member States, 
the elements included in the term are not totally identical, such identity would in 
fact be desirable for reasons of transparency. However, bearing in mind that 
much effort has been expended in communicating to consumers the meaning of 
the terms presently used in each Member State, it does not seem appropriate to 
propose a change in the wording used in the different languages. Nevertheless, 
it is desirable that a common feature be included in order to enable consumers, 
particularly in crossborder situations, to recognise these terms as being 
equivalent to those in use in their own Member States. Following discussions 
with government experts, and in accordance with the principles of proportionality 
and subsidiarity, it is proposed that the use of a symbol in addition to the existing 
term will be required. This symbol will be identical in each Member State. This 
will not constitute a change in the language of the term and will only involve a 
small additional cost for transposition. 
11. As far as the mathematical formula is concerned, it has been confirmed 
that the formula in Directive 90/88 is the only correct formula and it is therefore 
recommended that it should be retained and made definitely general throughout 
the Member States of the European Community and the other members of the 
EEA. 
12. As regards the elements of cost which should be included in the 
calculation of the annual percentage rate of charge, the transposition of the 
Directive has led to a situation where there is a harmonised minimum level of 
protection for all consumers throughout the European Community and the other 
members of the EEA. As Member States report few problems with their 
operation, and as any differences that do result are minimal in nature, it is not 
proposed to amend the list of exemptions in Article 1a(2) at this time. 
13. Accordingly, a draft Directive is proposed at the same time as this Report, 
dealing with the following amendments to Directive 90/88: 
the requirement to use, in addition to the term "annual percentage 
rate of charge", a common logo (symbol) which will be identical in 
each Member State 
the deletion of Article 1a(5) in order to remove the transitional 
measure and the references to this Report and associated 
legislative proposal 
the deletion of Article 1a(3) as this measure has not been availed of 
by any Member State11 
11 No objections were received from Member States to this proposal at the meeting in April 
1995 (paragraph 6 supra) or since. 
the insertion in Annex II of the Directive of a requirement to use 
accuracy to two decimal places - and any associated amendment to 
Annex III 
the insertion in Annex II of the Directive of a requirement to use a 
365 or 366 day year - and any associated amendment to Annex III 
linguistic changes to the English and Greek language versions of 
the Directive at Article 1a(1)(a) 
14. As regards other substantive elements of Directive 90/88/EEC, any 
proposals for amendments in this regard would be considered together with 
possible proposals following the outcome of the consultation on the Report on 
the operation of Directive 87/10212. 
12 Footnote 1 supra 
II The mathematical formula in Directive 90/88/EEC 
15. Directive 90/88 introduced a common method for the calculation of the 
"annual percentage rate of charge" into the requirement of price disclosure in 
consumer credit already contained in Directive 87/102/EEC. The intention was 
that the annual percentage rate of charge should add a commonly defined and 
acknowledged element of price disclosure to consumer credit, making its price 
comparable throughout the EC as well as between different forms of consumer 
credit. 
16. The Directive defined the mathematical procedure for calculating the 
annual percentage rate of charge as well as the elements of cost to be included 
in the calculation13. In addition, several assumptions were made for certain 
forms of consumer credit e.g. open-ended credit that does not provide all the 
information necessary to calculate the annual percentage rate of charge at the 
time of conclusion of the contract. 
17. The verbal definition of the "annual percentage rate of charge" is as 
follows: 
"the total cost of the credit to the consumer, expressed as an annual 
percentage, of the amount of the credit granted and calculated in 
accordance with Article 1a"u 
and 
"which shall be that equivalent, on an annual basis, to the present value 
of all commitments (loans, repayments and charges), future or existing, 
agreed by the creditor and the borrower, shall be calculated in 
accordance with the mathematical formula set out in Annex //"15 
18. This verbal definition is expressed in a mathematical definition found at 
Annex II of the Directive. The Annex clarifies, in mathematical terms, those 
obligations which shall be made equal in their present values through the annual 
percentage rate of charge. 
19. All the mathematical formulae currently in use in the European Community 
and the other members of the EEA for the calculation of the annual percentage 
rate of charge are basically derived from the same principles of interest 
calculation16. National deviations which lead to different forms of and 
results from the formulae applied do not derive from mathematical origins 
13 
14 
15 
16 Chapter IV infra 
Article 1.2(e) of Directive 87/102 (as amended by Directive 90/88) 
Article 1a(1)(a) of Directive 87/102 (as modified by Directive 90/88) 
Annex III of this Report 
but rather from differences in the assumptions applied to the calculations 
in certain Member States. Were these assumptions identical, so too would be 
the results. 
20. At this point an explanation is necessary, in simple mathematical terms, of 
the operation of the mathematical rules, both in order to understand the rules 
themselves and, more importantly, the other forms of calculation (the German, 
French and Finnish17 methods) which lead to different results as a result of 
differences in basic assumptions. 
1. Simple interest rate calculation 
21. The price of a credit is defined by the combination of three factors: 
the capital borrowed (AK) 
the charges or costs applied (CK) 
the time in which a capital can be used by 
the borrower (tK) 
22. The interest rate (i) is therefore expressed by the equation: 
Charges (CK) 
i = 
Capital (AK) * Time (tK) 
23. Using the convention that interest rates are expressed in relation to 100 
currency units (%) and for a time period of one year (p.a.), the equation reads as 
follows: 
Charges (CK) * 100 * 1 year 
i %p.a. = 
Capital (AK)* Time (tKjnyears) 
24. If time is calculated in months, then "1 year" in the upper part of the 
formula must be replaced by "12 months". Therefore 130.66 ECU for a loan of 
1,000 ECU for one year amounts to an interest rate of 
130,66*100/1,000*1 = 13.066 % p.a. 
17 Finland has availed of Article 1a5a to retain a formula different to that in the Directive. 
Once a single formula is confirmed for use throughout the EC, it is prepared - according 
to declarations from Government representatives - to adopt this formula - the derogation 
is not for reasons of principle but to avoid having to enact two possibly different laws in a 
short space of time. Finnish legislation does require the disclosure of APR. 
2. Yearly Compounded Interest 
25. In the simple formula (cost divided by capital and time) no compounding is 
foreseen. While banks always receive their interest by the end of the credit 
contract period, a bank which receives interest payments before the end of this 
period can reinvest this money and thus earn additional interest. In this way, the 
real charges in the example given would be not only the 200 ECU after 18 
months but also the additional 13.333% on 130.66 ECU (reduced by the amount 
that early payment would cost the borrower). 
26. Thus the simple interest rate does not match the real cost but produces a 
higher amount of charges than the consumer has consented to. In other words, 
the annual percentage rate of charge of different consumer credit contracts are 
not comparable if the period during which interest is compounded is not also 
equal. 
27. Taking the first example from Annex III of the Directive, where the lifetime 
of such a loan is not exactly 1 year but rather 18 months, with charges of 200 
ECU, the traditional simple formula would produce the following result: 
200* 100* 12 
= 13.333 % p.a. 
1.000* 18 
28. The example given in the Annex, however, states that the result should be 
13.066 % p.a. The reason for this difference lies in the fact that credit contracts 
for different time periods are incomparable without a uniform decision about what 
to do with the interest earned after a certain time period. To use financial 
mathematics terms, the question is at which time interest should be 
"compounded". 
29. The definition of an interest rate with reference to 1 year therefore means 
not only that all interest rates are expressed as "p.a." (which means that the 
lifetime interest rate of a credit is divided by the number of months and multiplied 
by 12) but that the compounding period for the credit should be uniformly 1 year. 
The formula given in Directive 90/88 and in use in the majority of Member States 
(henceforth referred to as the EC formula) fulfils this condition. The French 
method of calculation does not recognize this condition at all, thus giving rise to 
arbitrary compounding periods which in practice amount to 1 month. The 
German "Rule of 360" accepts a compounding period of 1 year, in principle, but 
deviates from it in every case where interest has to be calculated for less than a 
year, especially if the lifetime of the credit does not amount to exactly 1 or more 
full years. The reason is that calculating interest rates with a compounding 
period of 1 year is not possible with the simple formula given above. 
30. Criticisms have been voiced about the complexity of the EC formula and 
the need for technical expertise. In this context, it should be noted that the 
simple formula can only be used for a period during which the capital borrowed 
remains constant. In the case of credit with monthly repayments, the accurate 
calculation of the annual percentage rate of charge would require an 
approximation of many different calculations which, although simple in 
themselves, would need to be reiterated so many times that technical assistance 
would also be required. 
31. As will be shown below, the EC formula which is at present successfully 
used in the large majority of Member States, is merely the more developed form 
of earlier formulae (in order to take more variables into account) and is more 
convenient and accurate to use than the other methods presently in use. 
3. The 1 year compounding period: 
32. As the compounding of interest is an integral part of the calculation of 
interest, one must already "know" the interest rate in order to use the simple 
formula (to calculate that interest rate) since the first year's interest must be 
added to the capital which will bear interest in the subsequent period (e.g. in our 
example, in the remaining six months in a credit of 18 months duration). The 
interest rate can no longer be directly calculated but is calculated as a growth 
rate (i) of the original capital. 
33. An interest rate of 13.066% thus increases by (1 + i ) of the original capital 
(1 +0.13066) = 1.13066 
1,000 ECU amounts to 1,000 * (1 + 0.13066) = 1,130.66 ECU after one 
year. 
34. This is also referred to as the "future value" of a capital as it describes the 
growth rate after a certain time period has passed. The amount can also be 
considered in terms of "growth" rather than "interest", as the growth can easily be 
calculated. Interest is the difference between the original capital and its future 
value after this growth. 
35. In the case of a credit which is repaid in total after two years, the same 
result is achieved with the EC formula or the French or German formulae. The 
German and the French methods apply the simple formula in two steps: 
Year 1 Capital, = Capital + (Capital * i) 
Year 2 Capital2 = Capital + (Capital * i) + [Capital + (Capital 
* i)] * i 
Using the above example, another 0.13066 * 1,130.66 ECU = 147.73 ECU for 
the interest of the second year should be added to the 1,130.66 ECU, producing 
a result of 1,278.39 ECU. 
36. The EC formula, on the other hand, merely simplifies the equations in a 
still familiar way using simple algebra: 
Capital, = (1 + i) * Capital 
Capital2 = (1 + i) * (1 + i) * Capital 
= (1 + i)2 * Capital 
This simple form is directly calculable with calculators or computers using the 
exponential form of the same formula. In our example, (1 + 0.13066)2 * 1.000 
ECU = 1,278.39 ECU. In the same way, after three years, the formula would be 
(1 + i)3 * capital and after t years, capital, = capital * (1 + i)'. 
37. Thus the same result is achieved by the different formulae, though in a 
simpler way using the EC formula. However, this simplicity is not the main 
advantage - the formula can also be applied to fractions of a year because "t" 
expressed in years should properly be expressed as "t/1" which means that t 
supposes a compounding period of 1 year. If we express "t" in terms of months 
then "t" would be written as "tmonth/12". 
38. A capital of 1.000 ECU for 6 months lent out at a rate of 12% p.a. would 
grow to 
capital6 = 1-000 * (1 + 0,12)6/12 = 1,000 * 1,121/2 = 1,058.30052 ECU 
In the same way, instead of 6/12, this could be expressed as 182/365 days 
capital182 = 1,000 * (1 + fj,12)182/365 = 1,000 * 1,12182/365 = 1,058.13624 18 
39. An interest rate of 12% p.a. earns 58 ECU interest in a six month period if 
interest is compounded annually. While 58 ECU is less than half the interest the 
bank would have earned after 1 year, because this interest is being paid out 
earlier than foreseen in the compounding period, the bank can invest these 58 
ECU for 12% for the remaining six months, with a future value of 2 ECU, thus 
matching the 60 ECU for six months that would have been reached if 
compounding occured at the end of the compounding period (1 year). This result 
cannot be achieved with the older methods of calculation still in use in France 
and Germany. 
40. Using the German method, an interest rate of 12% p.a. on a capital of 
1.000 ECU would yield exactly 60 ECU for six months. If fractions of a year are 
involved, the simple form either fails to produce a result or does so by deviating 
from the underlying compounding period of 1 year e.g. by reducing it to 6 
months, in this case. Instead of p.a., it would be more accurate to describe it as 
6% per half year. 
18 The resu't is slightly different because a 365 day year does not divide evenly 
9 
41. In fact, the French method states that a rate of 6% for a half year may be 
multiplied by 2 to reach the annual percentage rate of charge. The compounding 
period in France is therefore regarded as unimportant and can be arbitrarily 
convened through the repayment periods (which in the case of consumer credit 
are normally monthly). The French method therefore usually uses a monthly 
compounding period. 
42. In Germany, on the other hand, the annual compounding period is 
prescribed as a rule. However, in order to avoid exponential calculation, it 
deviates from this rule for the last year of the life of a credit if this year does not 
amount to exactly 12 months. Consumer credit contracts with a lifespan of less 
than a year are therefore equally misrepresented in the German and the French 
calculations of the annual percentage rate of charge. The results differ from 
each other significantly if the life-span is more than a year19. 
43. Given the express intention in Directive 90/88/EEC that a single formula 
for the calculation of the annual percentage rate of charge should be used in 
order to facilitate the comparison between credit offers from different countries, 
the conditions of calculation must be uniform. One of the most basic conditions 
is that each annual percentage rate of charge should be calculated on the basis 
of the same compounding period of 1 year. 
44. Only the mathematical formula in Directive 90/88, in use in the majority of 
Member States, follows this condition and produces comparable annual 
percentage rates of charge . 
4. The EC formula 
45. The simplest form20 of this mathematical formula is 
V =AK *(1+i)' 
where 
AK is the initial loan augmented with all charges and interest at the end of the 
credit's lifespan 
AK is the initial loan 
i is the interest rate expressed p.a. (but not in percent) 
t is the lifespan of this loan 
46. It might have been closer to traditional legal understanding if the Directive 
had put emphasis on the total cost (C) of a credit instead of its 'present value', 
19 Table at paragraph 86 infra 
20 This form does not, in practice, fully take into account all elements of a transaction 
10 
although the mathematical meaning would have been the same, 
using total cost C would then have been: The formula 
Extended Capital + Total Cost 
AK + C Extended Capital multiplied by 
growth rate in the time period 
AK *(1+i)t the 
47. The annual percentage rate of charge is the factor which represents the 
growth of an initial capital, taking into account all charges for a given time period 
with annual interest compounding expressed as a percent per annum. The 
calculation is based on real time, with daily precision where loans, repayments 
and charges are debited or credited to the debtor. For the sake of accuracy, 
therefore, the results should be expressed to an accuracy of 2 decimal places 
and the year shall be expressed as having 365 days21. 
a) Present Value 
48. The present value of all repayments and charges in consumer credit is 
normally the initial loan. This means that if all charges expressed by the growth-
rate are subtracted, the principal (the original capital) will remain. For most 
normal calculations, as expressed in the examples of Annex III of Directive 
90/88, the above formula would be sufficient. But where there are deviations in 
practice e.g. with a loan being paid out later than the date of the contract (or 
more precisely the date on which interest is calculated), the amount of the loan 
would already include interest. The amount of the loan would therefore have to 
be used in the calculation with its present value. The EC formula therefore 
takes into account the present value of a loan in the following form: 
AK A K 
(l+i)c (l+i)*-
If the loan is paid out at the beginning of the calculation, t is 0 
b) Summing up different calculations: the E symbol 
49. Most consumer credit contracts do not take the simple form of a once off 
repayment at the end of their lifespans but are paid back in instalments. 
50. As the above mentioned formula (and the simple formulae in use in 
France and Germany) presupposes a constant interest bearing capital for "t", 
21 Table at Paragraph 125 infra 
11 
each credit must be divided into as many credit transactions as changes occur in 
the interest bearing capital. 
51. Therefore the annual percentage rate of charge is only correct if it is used 
equally in all individual calculations and if the sum of all present values ( £ ) is 
equal to the sum of the present values of the loans or if the growth of the loan 
expressed as one single growth rate is equal to all the charges and costs 
incurred, whether in the present or in the future. 
52. This is the formula used in the Directive, employing the z symbol to 
indicate that a sum is to be made out of multiple calculations. It is also the 
formula used in all Member States of the European Community and other 
members of the EEA with the exception of Germany, France and Finland. 
12 
Ill The calculation of the annual percentage rate of charge in the EC and 
other members of the EEA 
1. General Observations 
a) Interest and the annual percentage rate of charge 
53. Creditors calculate the price of credit in numerous ways and under many 
different names22. Although there are some general guidelines concerning the 
way in which charges for consumer credit are calculated, the definitions are far 
from uniform. Usually, creditors distinguish between "once-off costs" (one time 
only costs) such as fees and charges, and "interest" (variable or time costs that 
comprise all those charges which increase over the duration of the credit). 
Some banks put more emphasis on the (nominal) interest rate, others on fees. 
The method of distinguishing between fees and interest, and the methods of 
interest calculation differ not only between countries but also from one creditor to 
another. Sometimes this is due to the internal cost benefit calculation of a bank, 
or the fact that the creditor must share the profits with other institutions 
(brokerage fees, insurance premiums), or to facilitate the individual calculation of 
the cost of the credit by third parties (intermediaries or brokers). 
54. National law usually assumes that creditors are free to choose any 
appropriate and non-arbitrary method to define the cost of a particular credit. 
The only requirements are transparency and completeness in the list of charges. 
In some countries, there is an exception to the arbitrariness of the definition of 
the nominal interest rate, in connection with the requirements of Article 8 of 
Directive 87/102 (early repayment). This article requires national rules for the 
calculation of an equitable reduction in the cost of the credit. Some countries fix 
percentages of the total cost to be refunded23 while others state that the rebate 
should concern only "time costs" which are expressed by the nominal interest 
rate24. The situation varies from State to State25, as does the definition of 
22 
23 
24 
25 A 1984 survey revealed that the term "interest" was used in 13 different ways in Germany 
alone. It should be noted that this arbitrary use of terms only concerns internal 
calculations, not the legally prescribed disclosure of the APR. 
In France, this is three times the contracted amount for the next payment, and then 
reverts. Décret 90-979 of 31.10.90 (Article L311-29) 
The notion of "interest" in the rules on price disclosure must be distinguished from 
"interest" as used in restrictive rules on the refund of time-connected charges (e.g. 
anatocism or "interest on interest"), where courts do not interfere directly with the 
definition of nominal interest in the contract but rather recalculate the part of the cost for 
rebate by using their own definition of interest. 
In Germany the Supreme Court has held that a "disagio" was to be considered not as a 
once-off fee but as hidden interest and therefore to be partially refunded in the event of 
early repayment. Bundesgerichtshof, 16.11.93, XI ZR 30/93 
13 
"equitable". The rule usually used for such calculations is the "Rule of 78"26 
which it is generally agreed is inaccurate, but acceptable in small credit 
transactions. 
55. The Directive did not interfere with the methods of calculation of early 
repayment already in use or with the definitions of interest used internally in 
contracts. As far as interest was concerned, the Directive aimed to harmonise 
the notion of interest as it is used in the "interest rate" for price disclosure, i.e. to 
state a uniform requirement to disclose the result of this cost calculation in a 
Community-wide comparable credit price - the annual percentage rate of charge. 
56. In this respect all Member States are in agreement - no State leaves it to 
the discretion of the contractors to define the method of calculation of the annual 
percentage rate of charge or the elements to be included although, as we have 
seen, France and Germany have left some arbitrary elements insofar as creditors 
may influence the annual percentage rate of charge by choosing special life­
spans for their credit contracts. 
57. The form of the regulation varies. Most countries do not simply transcribe 
the verbal form of the calculation into their law but leave its mathematical 
definition to administrative bodies. 
b) Verbal Definitions of the annual percentage rate of charge 
58. Directive 90/88 defines the annual percentage rate of charge directly by 
the method of its calculation, while Directive 87/10227 presupposed a definition. 
National legislation distinguishes between the definition of the annual 
percentage rate of charge and the method of its calculation, using the 
traditional relationship between time, cost and capital expressed on an annual 
basis in percent as the most important element of definition followed by the 
method of its calculation28. 
26 
27 
28 Accurately defined in Section 2.510 of the US Consumer Credit Code Regulation Z 
§226.8(b)(7), the "Rule of 78" takes its name from the sum of the digits 1 through 12. In 
the first month, the creditor earns 12/78ths of the agreed interest. After 2 months, the 
creditor has earned 23/78ths i.e. the first 12/78th plus 11/78ths... The formula wherein 
the time periods are expressed as months defines those parts of the total interest earned 
which must be refunded as follows: 
frest of lifetime in months + 1)*rest of lifetime] * total interest 
(lifetime in months + 1 )*lifetime in months 
For commentary, see German Bundesgerichtshof Neue Juristische Wochenschrift 1979 
p. 542. 
Article 1.2e of Directive 87/102, amended by Directive 90/88 
Annex II of this Report contains a list of and brief analysis of national transposing 
legislation 
14 
° Denmark29 requires the statement of the "annual costs in percent" 
0 Germany30 defines the "initial effective interest rate" as "the total amount of 
charges expressed as an annual percent rate of the net capital or cash price" 
° Spain31 defines the "annual equivalent rate" as the total cost of credit 
expressed as an annual percentage of the capital lent" 
0 France defines the rate as the "global effective rate" 
° Ireland32 defines the rate as the total cost of credit expressed in an annual 
percentage of the amount of credit given ..." 
° The Italian33 and Portuguese34 laws use a similar definition 
0 The Netherlands35 defines an "effective credit remuneration percentage on a 
year-basis as the reward for the credit according to the agreement, expressed 
as a percentage for a year of the open balance" 
0 Sweden36 defines the "effective interest" as "the credit cost to the consumer, 
expressed as an annual rate in percent of the amount of the credit granted, 
where the instalment payments made during the life span of the loan have 
been appropriately taken into account." 
59. Similar definitions can be found in the other Member States. The UK37 is 
the only State to refer to the compounding period: "The annual percentage rate 
of charge is a rate per annum compounding annually expressed as a percentage 
such that a) the sum of present values as at the relevant date of all repayments 
of credit and the total charge for credit; and b) the sum of present values as at 
the relevant date of all credit under the agreement would, when calculated at 
that rate be equal." Austria combines both definitions in one article38 and 
defines the annual percentage rate of charge as the "decursive percentage rate 
for a full year which establishes numerical equality between the sum of the credit 
paid out and the sum of all payments ..." and provides the explanation that "It 
expresses the total cost of credit in relation to the credit granted ..." 
29 Art. 9.1.4, 1990/398 Lov om kreditaftaler of 13.6.90 
Art. 4 alinéa 2 of the Verbraucherkreditgesetz of 17.12.90 
31 Art. 18 b of the Ley de crédito al consumo of 23.03.95 
32 Consumer Credit Act 1995, s.9 
33 Art. 19 Legge Communitaria 142 of 19.2.92 
34 Art 2, al (a) Decreto-Lei of 21.09.91 
35 Art 1.2 k Wet op het consumentenkrediet of 04.07.90 
36 Art 2 Konsumentkreditlag 830 of 1992 
37 Statutory Instrument on Consumer Credit Regulation 1980/51 Art. 9 al. 1 
38 Title VIII, Art. 33 al. 4 of Bankwesengesetz 1993/532 
15 
2. The Application of the EC formula 
60. With the exception of Germany, France and Finland, all the Member 
States of the European Community and the other members of the EEA have 
incorporated the EC formula into their national legislation. The majority of them 
(except the United Kingdom), did so in reaction to the Directive. 
61. In some cases, the wording of Article 1a was used and the mathematical 
equation, in Annex II was copied, though sometimes the symbols were replaced 
by others (because it was felt that different symbols for repayments and loans 
would make the formula easier to read). Some countries have literally 
incorporated the mathematical formula of the Directive. This is the case for 
Denmark, Greece, Italy, Luxembourg, Portugal, Sweden and Iceland. 
62. The remaining Member States either used other symbols, elaborated 
different examples or gave more verbal explanations in the construction of the 
formula but kept to the basic equation, using the "internal rate of return" or 
exponential growth: 
In Belgium39, the "balanced cash value equation" given in the Directive is 
restated using different symbols. An iteration procedure that can be used 
to solve the balanced cash value equation is described and this procedure 
is applied step by step to several examples 
In Spain40, the formula is developed in two steps and examples different to 
those in the Directive are given in the Annex 
In Ireland41, the conditions and applications of the formula are explained in 
words and, particularly, growth and cash value as well as the iteration 
procedure are explained. In addition, accuracy is also covered 
The Netherlands has developed "Rules on Effective Credit Yield"42 which 
elaborate on the mathematical procedures in some detail. The "effective 
credit remuneration percentage on a year-basis" is developed on the open 
balance of a credit. The calculation of an open-ended credit is also 
explained 
Similarly, Austria43 uses the EC formula with different symbols and also 
developed the "fictitious annual interest rate" for open end credit 
The UK has a vast body of rules regulating the general requirements of 
the Consumer Credit Act. The mathematical formula in the Directive 90/88 
39 
40 
41 
42 
43 Arrêté Royal 2311 of 04.08.92 (amended on 29.04.93 by 1381/1993) 
Article 18a Ley de crédito al consumo, 23.03.95 
Consumer Credit Act 1995 
Regeling effectief kredietvergoedingspercentage of 06.11.91 
Title VIII Art. 33 al.4 of the Bankwesengesetz 
16 
is restated44 and three examples are developed, demonstrating different 
degrees of sophistication in the mathematical procedure. 
In Norway45, "effective interest" is calculated with the same formula as in 
the Directive 
3. The calculation of the annual percentage rate of charge in Germany 
and France 
63. As mentioned above, the difference between the mathematical formulae in 
use in Germany and France, and the EC formula lies basically in the 
unwillingness of those countries to use exponential calculation. Mathematically, 
this results in a situation whereby neither country can apply a 1 year 
compounding period for all circumstances. 
a) The German Method 
64. The German method calculates interest for 12 months and compounds it 
at the end of this time before restarting interest calculations for the next 12 
months. If the last year does not have 12 months, interest is compounded earlier. 
Legally, this result is achieved through a complicated reference scheme. Article 
4 of the Consumer Credit Act refers to Article 4 of the Price Disclosure 
Regulation which, for the purpose of interest calculation, refers to Art. 608 of the 
Civil Code. 
65. However, Art. 608 makes no reference to "interest calculation" but deals 
only with the question of the time at which debtors must pay interest in the event 
that nothing has been agreed (in which case it establishes a rule that interest 
must be paid annually or, if a credit is repaid in less than 1 year, at the time of 
repayment). Art. 4 of the Price Disclosure Regulation applies this rule to interest 
calculation by citing this article as well as by using the description "cascade 
method" (Staffelmethode). 
66. As we have seen above, the question of the time at which interest is paid 
and the time at which it is compounded are not linked to each other if the 
exponential form of the calculation is used. 
44 Statutory Instrument 15 of 1980 The Consumer Credit (Total Charge for Credit) 
Regulations 1980 of 29.01.80, Art. 6 to 11 
45 Forskrift til kredittkjopsloven of 15.07.86, N° 1616 
17 
67. In practice, the real source of the German method is a paper by the Bund-
Lander-Kommission "Preisauszeichnung"46. Here the method is explained and a 
formula is given that uses exponential forms, though these are by definition more 
complicated than the EC formula because simple calculations becomes 
extremely complicated if expressed in correct mathematical terms. This method 
is known as the "360 day method" due to its additional assumption that a year 
has 360 days. 
68. The German formula poses a problem not only for comparisons with 
products in other Member States but also within Germany. In particular, credit 
for periods of less than a year deviates significantly if the annual percentage rate 
of charge is stated in the German form. 
69. If a consumer has the choice between: 
4 consecutive credit contracts, each of 3 months duration, with an annual 
percentage rate of charge of 12% p.a. each, or 
one credit contract of 1 year duration with an annual percentage rate of 
charge of 12.5 % 
calculated according to the German "360 day method", producing 1,000 ECU net 
capital without additional costs, the consumer would have to pay 125 ECU in 
interest in the second case at the end of the year and 30 ECU every quarter in 
the first case. But if they had paid the interest in the first case at the end of the 
year (as in the second case), this would cost them an extra interest charge of: 
[(12% on 30 ECU for 9 month) + (12% on 30 ECU for 6 month) + (12% on 
30 ECU for 3 month)] = 0.12 * 30 * (9 + 6 + 3)/12 
= 5.40 ECU. 
70. Aithough the German price disclosure regulation was correctly applied, the 
consumer would have made the wrong choice if they had chosen the "cheaper" 
credit. 12% p.a. in fact involves a surcharge of 5.40 ECU or an "effective interest 
rate" of 12.54%. 
71. Thus in Germany, a consumer contracting for 42 months and another 
contracting for 48 months cannot properly compare their annual percentage rate 
of charge because the 48 months involves compounding periods of 1 year while 
the other uses 1 year for the first three years and 6 months for the rest of the 
life of the credit. The German method is not "correct" in a mathematical sense 
because the rule of a 1 year compounding period is obviously not observed in 
46 An administrative body which lays down the surveillance principles for disclosure in price 
regulations. The reference for the formula is: Bund-Lander AuG.chull.es "Preisangaben" 
Bemeinsamen Amtsblatt des Landes Baden-Wurttemberg, seite 27, 05/02/93 
all cases, and calculations that are based on different general assumptions and 
conditions are not equal47. 
72. The German system requires two different formulae for interest calculation: 
the "Rule of 78" for rebates and the rule of 360 for price disclosure. In cases 
where it is necessary to calculate the present value, it also uses the EC method. 
The EC method would enable the calculation of rebates with the same formula48. 
73. The main differences between the German and the EC methods are 
related to the time period. The most significant differences occur in short term 
credit covered by the annual percentage rate of charge disclosure requirements 
of the Directive. As the Directive partially excludes current account credit as well 
as credit which must be repaid in less than 3 months or with no more than four 
instalments and a life span of 12 months, the most striking cases are legally 
outside the scope of the Directive. However, the Directive does require the 
indication of an "annual rate of interest49" for such credit as well. 
74. Although this rate is not covered by the requirements of the mathematical 
formula in Directive 90/88, many countries approach both annual interest rates in 
the same manner. The problem concerning short term credit of less than one 
year is therefore increasing. For instance, credit card credit in particular is the 
first form of crossborder consumer credit. But credit card credit, although 
expressly subject to the annual percentage rate of charge requirements, tends to 
be short term credit and may thus escape these prescriptions. 
75. The differences between the German and EC methods as regards 
consumer credit for a period of more than one year are less significant. 
b) The French Method 
76. The French method of calculation of the annual percentage rate of charge 
does not recognize the importance of a generally fixed compounding period. The 
47 
48 
49 There have been some developments in recent years. The German Bundesgerichtshof 
has stated, in its decision of March 12, 1991 (XI ZR 190/90), that in case of early 
repayment of a mortgage loan a bank can only ask the ..present value" of future interest 
as recompensation of lost profit. This present value is calculated according to the same 
rule as implied in the EC-formula and generally accepted by German banks. In addition, 
some banks now use the EC-formula for the rebate in consumer credit because the old 
"Rule of 78" is inapplicable in cases where instalments are not equal. 
At present, the use of the "Rule of 78" is necessary because the Rule of 360 cannot be 
applied to calculate a rebate rationally - no bank applies this rule. 
Article 6 of Directive 87/102 
19 
relevant Order50 permits the use of different periods and period rates e.g. of 1 
month, 3 months, half a year etc, with interest compounded within each period. 
The only precision is that if irregular payments are made, only one period should 
be used for interest compounding. The period rate for one month is then 
transformed into an annual interest rate simply by multiplying it by 12. 
77. This conversion is misleading because an annual rate is disclosed which is 
in fact not based on annual compounding periods but on invisible, mostly 
monthly, compounding periods. As shown below51, this leads, especially in 
consumer credit with monthly instalments, to very significant differences. French 
consumer credit contracts thus appear artificially more favourable to the 
consumer than in all the other Member States of the European Community and 
the other members of the EEA. While the German deviation is mathematically 
inconsistent and creates artificial difficulties in calculation but has modest effects 
on ordinary instalment credit (though these may be greater if once-off fees are 
important), the French method deviates so significantly that the French interest 
rates are misleading not only to other Europeans but also to French consumers 
who do not get a correct idea of the differences between credit prices e.g. 
between credits with monthly or quarterly instalments. 
78. The reasoning behind the French method seems to be that in their view, 
the function of the annual percentage rate of charge should indicate the burden 
on the consumer, (although it seems to be accepted that the current EC formula 
is normally used among businessmen)52. However, this is reasoning is 
erroneous, a misunderstanding of the function of the annual percentage rate of 
charge. The annual percentage rate of charge does not indicate "the burden on 
the consumer" - consumers can evaluate the burden on their budget only if it is 
expressed in currency units because all their monthly income and expenditure is 
expressed in such currency units. In order to answer the consumer's question 
as to whether they should take a particular credit, the obligations set out in the 
Directive regarding the disclosure of instalments and the total cost, as well as the 
total amount of the debt, are crucial. Only commercial clients may use the 
annual percentage rate of charge as an indicator for the burden because they 
50 Art. 1 of Décret relatif au calcul du taux effectif global, N° 1985/944 of 04.09.85 
51 
52 para 85 below. See also §381-1 of Gavalda and Stoufflet: Droit Bancaire (2nd ed) and 
§28 of Biardeaud: Guide Pratique pour le contrôle des crédits immobiliers. 
An example of this is the comment made by the Economic and Social Committee on the 
EC formula when initially proposed: OJ n° 337 of 31.12.88 p. 1-4 §3.3.1: 
"This formula allows for the continuous reinvestment of income as is normal 
among businessmen, in this case the crediting of yield from the reinvestment of 
repayments made by the borrower. In practice, this is how the lender, but not the 
consumer, assesses the value of the loan. For the consumer, the reinvestment of 
income in terms obtainable by the lender is deceptive. ... it is important to know 
the burden of the borrower. " 
20 
can compare it to their own profit rate or the interest rate which they earn with 
other capital. 
79. The annual percentage rate of charge thus answers the consumer's 
question as to which credit they should take. It is a means of comparison. In 
this respect, the formula in Directive 90/88, which presupposes annual 
compounding also in the case of monthly payments, is the only way of 
comparing equally calculated products. 
80. It should also be noted that financial developments mean that, for the 
consumer, the date of payment is also worth money because some credit card 
accounts even allow overpayment and pay interest on a positive balance. 
81. The older argument, that the annual percentage rate of charge in France 
is identical with the usury rate and that this rate can not be changed because it 
would make credit usurious which had not been usurious before, no longer 
applies due to a change in the French method of regulating usury. 
c) Comparison of the EC formula and the German and French methods 
82. In the following table, a fixed instalment loan of 1,000 ECU with 120 ECU 
interest for one year is calculated. In this table, the top rows show clearly that in 
all three cases the basic items needed to calculate an annual percentage rate of 
charge (cost, time and principal) are the same. 
83. In the German method, interest is calculated every month but only 
compounded to the principal at the end of the year. Three different calculations 
are necessary: 
Each month 
1. Capitaln = Capital,.., - Instalment; 
2. Interest = Capital,* i/12 
At the end of the Year 
3. Capital12 = Capital12 + z [lnterestn ] 
84. In the French method, interest is calculated as in the German method, 
but compounded monthly. Only one calculation is necessary each month: 
Each month 
Capitaln = Capital,.., - Instalment + Capital,.., * i/12) 
85. The EC formula only requires one calculation each month because it 
calculates the capital growth: 
Each month 
Capital, = Capital^ *(1+i)1/12 
21 
The interest can be derived from the capital column by simply subtracting the 
different balances after instalments have been deducted: 
Each month 
Interest, = Capital,.., Capital, - Instalment 
86. It can be seen that, in all three cases, different interest rates lead to the 
same amount of interest under the same conditions. While the German method 
comes quite close to the EC method, the French method deviates significantly. 
Loan (ECU) 
Instalment (ECU) 
Credit Cost (ECU) 
Life Span (months) 
APR 
Month 
1 
2 
3 
4 
5 
6 
7 
8 
9 
10 
11 
12 
Sum GERMANY 
1000.00 
93.33 
120.00 
12 
24.66% 
Capital 
1000.00 
906.67 
813.33 
720.00 
626.67 
533.33 
440.00 
346.67 
253.33 
160.00 
66.67 
26.67 
0.00 
1120.00 Interest 
20.55 
18.63 
16.71 
14.79 
12.88 
10.96 
9.04 
7.12 
5.21 
3.29 
1.37 
- 0.55 
120.00 FRANCE 
1000.00 
93.33 
120.00 
12 
21.46% 
Capital 
1.000,00 
924.55 
847.75 
769.57 
690.00 
609.00 
526.56 
442.64 
357.22 
270.28 
181.78 
91.69 
0.00 
1120.00 *Ë 
Interest 
17.88 
16.53 
15.16 
13.76 
12.34 
10.89 
9.42 
7.91 
6.39 
4.83 
3.25 
1.64 
120.00 C-DIRECTIV 
1000.00 
93.33 
120.00 
12 
23.70% 
Capital 
1000.00 
924.55 
847.75 
769.57 
690.00 
609.00 
526.56 
442.64 
357.22 
270.28 
181.78 
91.69 
0.00 
1120.00 Interest 
17.88 
16.53 
15.16 
13.76 
12.34 
10.89 
9.42 
7.91 
6.39 
4.83 
3.25 
1.64 
120.00 
87. In the following table, we have used different life spans for a credit of 
1,000 ECU, assuming that the creditor would take 10 ECU interest for every 
month of the lifespan of the credit. (This would be a rate of 1% using the 
traditional method of nominal interest calculation, which is not an interest rate 
but a parameter for easier interest calculation). 
LifeSpan 
(months) 
6 
12 
18 
24 
48 Cost (ECU) 
60 
120 
180 
240 
480 German 360 day 
method 
21.49 
24.66 
24.27 
24.34 
23.09 EC method 
22.29 
23.70 
24.00 
23.84 
22.86 French method 
20.29 
21.46 
21.65 
21.58 
20.75 
22 
88. It shows that the German deviation is quite significant for periods of less 
than a year. For longer periods, the difference between the German method 
and the EC method is quite small. However, the difference between the EC 
method and the French method is between 2 and 3%. The crossborder 
implications of this are already being felt in certain areas53. 
89. In any event, there is no direct relationship between the interest rates 
which would enable a consumer to simply add 2 or 3% to the French (or 
subtract 0.2% from the German method) because the size of the difference 
depends on the life span as well as the up-front fees and the interest rate. 
4. Arguments in favour of the EC formula 
90. If the annual percentage rate of charge is seen as a main factor in 
choosing between different products, the EC formula is mathematically the only 
way to guarantee that the price represents equal conditions. All the regulations 
concerning the costs to be considered in the annual percentage rate of charge 
calculation are meaningless if the mathematical procedure of their inclusion is 
not homogeneously defined. 
91. The annual percentage rate of charge is the only form of a credit price 
that can help consumers to shop across the borders in the Single European 
Market. It will simplify the legal framework for consumer credit and make 
national transposition measures more consistent, as well as providing a proper 
framework for possible future legislative action at Community level as well. As 
some countries also apply this legislation to mortgage loans, and the 
differences between mortgage loans and consumer credit are vanishing 
(second mortgages are used for consumption purposes while the last 20% of 
an uncovered loan for a home is often given in the form of consumer instalment 
credit), it would be important, in case of harmonisation in this area, that there 
would be a unified system of annual percentage rate of charge calculation from 
the outset. As credit card credit will be the first form of consumer credit to be 
offered across borders, and the use of credit cards linked to special instalment 
open-ended credit offers is increasingly exponentially, a uniform price 
disclosure system might also be needed in this context. 
92. The potential cost of adapting banks' computer programs and price 
structures to handle the EC formula in those countries that do not presently use 
the formula is not a striking argument. The banking sector in the other 
Member States have already made this investment in order to adapt to their 
national legislation as it was transposed. In addition, banks in France and 
Germany frequently adjust their programmes to take account of case law and 
53 German banks already offer consumer credit in Alsace, while Credit Lyonnais, having 
purchased a German bank (BfG), are beginning operations in Germany. Complaints 
have already been received from French consumers who have been misled by a 
mortgage loan linked to a capital life insurance, the true APR of which, as well as the 
dangers, had not been made clear by the German bank 
23 
administrative rulings on the subject e.g. for the calculation of rebates in the 
event of early repayment of consumer credit and mortgage loans; for the 
calculation of damages in the event of early repayment. In addition, some of 
the calculations are already done using the mathematically correct form. 
93. Programming will also be easier using the simpler EC method. Only the 
EC formula offers consumers the possibility of directly calculating the increase 
of a capital over a period of years. Its simplicity (1000 ECU for 98 years at an 
interest rate of 9.6% will yield to (1 + 0.096)98 * 1000 = 7,969,559.30 ECU) is 
striking and merely requires the use of a home computer or even a pocket 
calculator. 
24 
IV. Elements of cost to be included in the calculation 
a) Elements of Cost 
94. The Directive requires that all credit costs must be included in the annual 
percentage rate of charge calculation. . The "total cost of credit to the 
consumer" means: 
all the costs, including interest and other charges, which the consumer 
has to pay for the credit. 
95. The mathematical formula requires that the difference between the 
present and future value of the capital borrowed should include all the elements 
of cost to be included in the calculation i.e. not only the nominal interest but all 
other charges which can be attributed to the credit as such and not to other 
separate services of special value to the consumer. 
96. With the exception of insurance fees, the Directive uses the indirect 
method, allowing the omission of five types of costs which are supposed to be 
"credit costs". Art 1a(2) allows the following charges to be excluded from the 
calculation of the "total cost of credit to the consumer: 
i) charges payable by the borrower for default 
ii) charges (other than the purchase price) payable regardless 
whether the transaction is by cash or credit 
iii) charges for accounts, transfers... (except where the consumer 
does not have reasonable choice or such charges are abnormally 
high) 
iv) membership subscriptions 
b) Situation in the Member States 
97. As the number of items which could be considered as elements of cost 
to be included in the calculation is, theoretically speaking, unlimited, most 
countries simply repeat the exemptions in Article 1a(2), definitely excluding 
those items from the annual percentage rate of charge calculation, regardless 
of how closely they are related to the credit. Thus the regulations in 
Denmark, Greece, Ireland, Italy, Luxembourg, Portugal and Norway follow 
closely the wording of Article 1a(2) of the Directive, with practical application 
generally left to case law. 
25 
Art 
1a2 
B 
DK 
D 
EL 
ES 
F 
IR 
IT 
L 
NL 
0 
PT 
SF 
SV 
UK 
IS 
LI 
N i 
/ 
/ 
/ 
/ 
/ 
• 
/ 
/ 
/ 
/ 
— 
S 
/ 
/ 
/ ii 
/ 
/ 
/ 
/ 
/ 
/ 
/ 
/ 
— 
/ 
— 
/ 
/ 
/ 
/ iii 
/ 
/ 
/ 
/ 
/ 
/ 
/ 
* 
/ 
/ 
/ 
/ 
/ 
/ 
/ iv 
/ 
/ 
/ 
/ 
* 
/ 
/ 
* 
— 
/ 
— 
/ 
/ 
/ 
/ V 
* 
* 
/ 
/ 
* 
/ 
/ 
/ 
* 
* 
/ 
* 
* 
* 
* 
/ 
/ Comments 
Open list of charges to be included. For insurance, the criteria is 
whether a reasonable choice is given 
Insurance which does not secure repayment is exempt, whether 
mandatory or not 
All charges are included in the rate, including mandatory insurance 
charges (but non-mandatory ones are not listed as exempted) 
All charges are included in the rate. Jurisprudence has resulted in 
some changes. 
If the range of services provided is wider than credit, membership 
fees are not included. If credit is the main activity, the fee is 
included 
If account fees., or insurance fees are obligatory, they must be 
included. There are no membership fees. 
All charges except those for non-mandatory insurance are included 
The Act exempts no costs (including insurance). 
All mandatory costs are included. 
All costs, including non-mandatory insurance, are included 
/ = Corresponds to Directive 90/88 i.e. these charges are specifically excluded 
from the calculation of the Global Annual Effective Rate 
= Goes further than the Directive - there is no specific exemption for these items 
- but they may in practice be excluded 
* = See individual comments and relevant paragraphs below 
98. In Denmark, the costs to be included are more comprehensive than in 
the Directive54. In Belgium there is a positive list of those elements of cost to 
54 Article 13 of the 1990 Credit Agreement Act defines the total price of credit as the sum of 
all charges with the exception of certain charges (corresponding to those in the Directive, 
but more restricted). Charges are divided into three types: those to be included in the 
26 
be included in the calculation which must be included55 as well as a list similar 
to the exemptions in the Directive (although provided the consumer has a 
reasonable choice, neither the costs of a credit card which are not connected 
with credit nor insurance costs are included). Italy and Luxembourg also have 
an open list of charges to be included in the calculation, though the list of 
exemptions is closed. Member States, in practice, arrive at lists similar to that 
of Belgium through their reference to the term "credit cost" which includes 
items like brokerage fees, up-front fees, disagios... which must be included in 
the annual percentage rate of charge calculation. 
99. The situation in other Member States differs slightly - Spain, France, 
Finland, Sweden and the UK are tacit on the subject of the list in Article 1a(2). 
This does not necessarily mean that they deviate from the practical method of 
annual percentage rate of charge calculation, because they assume that the 
general definition of the elements of cost to be included in the calculation 
already leads, in principle, to the exclusion of certain of the items concerned 
(fees for late payments, fees for bank accounts, membership fees and special 
cash price fees). These States do, however, make an important distinction in 
that they generally exclude only those elements of cost to be included in the 
calculation which are not mandatory - while the majority of States exclude the 
items listed in Article 1a2, these States apply a test of how the fees have 
entered into the contract. They therefore apply the distinction in Article 1a2(v) 
concerning insurance fees to all other charges. 
100. The Spanish legislation requires all charges to be included in the 
calculation, including mandatory insurance charges. Non-mandatory insurance 
is not mentioned as specifically exempt from inclusion. The elements of cost 
to be included in or excluded from the calculation are not listed, except as 
regards insurance premiums and default fees56. 
101. In France, Article L. 313.1 of the Consumer Code states that the 
calculation must reflect all interest and other charges, commissions and 
remunerations of any kind, direct or indirect... e.g. including payments to 
intermediaries. The Comité Consultatif of the Comité Usagers of the Conseil 
annual percentage rate of charge but not necessarily mentioned individually (e.g. charges 
by the creditor or third parties); those to be listed but not included in the annual 
percentage rate of charge (membership fees...) and those to be neither listed nor included 
(cheque fees, transaction fees unless the method is compulsory...) 
55 Article 2.1 of the Arrête Royal 1381 of 4.8.1992 contains an open list of charges which 
should be included in the "taux annuel effectif global". These include charges for: 
inquiries, advertising, the creation of a file, inquiries at a credit register, administration of 
the file, accounting and collection, intermediaries, credit insurance, guarantees and other 
personal securities, and anything else the creditor requires for the credit... 
56 Article 6.2c of the 1995 Consumer Credit Act states that debt insurance, if required by the 
lender, must be indicated in the total cost. It also exempts from the calculation charges 
in the event of default 
27 
National-du Crédit, in a Report, produced a detailed list of such charges57, 
though the list does not appear to be binding in nature: 
Charge included Charge not included 
establishment and administrative costs book-keeping fees 
costs for securities and warranties fees for not using a credit granted58 
guaranteeing a bill of exchange 
notary costs service charges 
stamp duty postage 
compulsory death insurance premiums non-compulsory death insurance premiums 
overdraft charges 
fee for keeping money available 
fee for confirmation 
account statement fees59 
fees for endorsements 
Case law and administrative precedent have included certain elements in the 
calculation e.g. account fees and insurance premiums. Companies in France are 
prohibited from selling both credit and insurance, and mandatory insurance is not 
required for consumer credit but rather for mortgages. 
102. Credit costs in Finland are defined as "the total amount of interest, costs 
and other payments that the consumer shall pay on the basis of the consumer 
credit relationship. No list of items to be included or excluded is provided. Since 
1993, insurance premiums are excluded and must be listed separately. 
103. Credit costs in Sweden are defined as the total sum of all cost elements 
(interest, additional costs and other charges). In theory, there are no exemptions -
all elements of cost to be included in the calculation must be included in the 
annual percentage rate of charge. In practice, the exemptions in the Directive are 
used. Insurance charges, however, are not mentioned in the regulations. If credit 
is combined with insurance, or if a separate insurance is mandatory, these costs 
must be included. Charges to third parties, which arise in connection with 
mortgages (which are within the scope of the Act) are not mentioned. 
104. The UK also defines the total charge as the interest and other charges at 
any time payable under the transaction. The exemptions60 are much more 
57 
58 
59 
60 Report on the Reform of Usury Legislation, December 1992. The list is described as 
'being given "under the reservation of the sovereign appreciation by the courts" 
Listed under different names as a cost to be included (commission d'immobilisation, 
commission d'engagement sur autorisation, commission de confirmation) and under two 
names as a cost to be excluded (commission de nonutilisation, commission d'attente). 
Though there also appears to be an obligation to provide these free of charge 
Defined in Article 5 of the Statutory Instrument The Consumer Credit (Total Charge for 
Credit) Regulations 1985 
28 
detailed than in the Directive - there is differentiation between different forms and 
purposes of credit. All premiums for life insurance are exempted61. Initial fees 
(e.g. for administration costs) are common in UK consumer credit, and may be 
either added to the balance or paid up front. Rest debt insurance (against 
accident, sickness or unemployment) is common but usually only covers the 
instalments during that period of illness or unemployment and may be of limited 
duration. Life insurance cover is often required for larger loans. 
105. As regards the remaining Member States, an initial administration fee is 
usually required for consumer credit in Germany, but some banks claim to use no 
other ancillary charges (periodic fees, statement fees...). Germany uses the same 
exemptions as in the Directive. Rest debt insurance is offered, but is usually not 
mandatory for consumer credit. Where it does apply, it is usually paid as a 
lumpsum in advance, and the costs must be listed separately. Insurance which 
does not secure repayment is excluded from the calculation, whether mandatory or 
not. 
106. The Austrian regulation defines the cost elements to be excluded from the 
calculation; These exceptions differ from those in the Directive in that Austria 
does not mention charges other than the purchase price which must be paid 
regardless whether the transaction is by cash or credit, or membership fees. 
These does not necessarily mean that these are to be considered as interest, as 
they could be considered as part of the purchase price. Nor do charges required 
by the State have to be included. Customers must also pay for their annual bank 
statements. 
107. In the Netherlands, only direct credit charges (including mandatory rest debt 
insurance), fees in case of default and compensation in the event of premature 
repayment are permitted to be included in the calculation62. No other charges are 
permitted for consumer credit, either as initial charges or periodic fees. If 
services connected with the credit (e.g. death, unemployment, invalidity and other 
insurance) are offered, the charges must be included in the annual percentage 
rate of charge, may not be counted as separate payments, and must not surpass 
the maximum rates listed in the order on Credit Remuneration63. Rest debt 
insurance is common, but compulsory insurance with consumer credit is not 
allowed. 
108. In Iceland, the total cost of credit includes all interest and other charges to 
be paid by the consumer, with the exemptions listed in the Directive. Charges for 
the transfer of funds and for keeping an account (except collection charges) are 
61 Statutory Instrument: The Consumer Credit (Total Charge for Credit) (Amendment) 
Regulations 1985 
62 Article 34 of the Consumer Credit Act prohibits all "rewards for the lender" other than 
these charges. 
63 Besluit Kredietvergoeding, Stb. 1991/549 of 16.10.91 
29 
exempted only when the consumer has reasonable freedom of choice in the way 
funds are transferred or collected and the charges are not abnormally high. The 
inclusion of insurance costs is not restricted to compulsory insurance. 
109. Unlike the exemptions listed in Article 1a(2)(i)-(iv), Article 1a(2)(v) of the 
Directive indicates the only positive item to be included in the calculation of annual 
percentage rate of charge. It exempts charges for insurance or guarantees from 
inclusion in the calculation, except death, invalidity, illness or unemployment 
insurance which are to be included in the calculation, as are other charges which 
have to be imposed by the creditor "as a condition for credit being granted". All 
countries have, in one way or another, referred to this in their legislation. 
Interpretations differ, however. Some countries assume that such insurance 
premiums are always mandatory and therefore regularly included, while others e.g. 
Germany repeat the text of the Directive literally but in practice assume that credit 
life insurance is never mandatory. This is because of their legal definition of the 
concept of "condition" whereby insurance is interpreted as being "imposed by the 
creditor as a condition for the credit being granted" only if the credit contract is 
legally linked to the insurance contract whereas in practice creditors offer two 
separate contracts which are only linked by the fact that the bank will only grant 
the credit if the insurance is also taken. In this respect, Belgian legislation takes 
the other view, asking whether a rational choice between a credit contract, with or 
without such an insurance coverage, has been offered. In practice, this usually 
lead to the inclusion of such premiums64. The UK appears to be the only country 
which expressly excludes life insurance premiums from the annual percentage rate 
of charge calculation even though such insurance is obligatory for credit contracts. 
110. These differing interpretations of Art 1a(2)(v) can lead to differences in 
annual percentage rate of charge calculations for identical products in different 
countries. Unlike the charges excluded by Article 1a(2)(i) to (iv), insurance 
premiums are an important element of the burden of charges on a consumer (up 
to a quarter of the credit costs in some cases). It may be necessary to exclude 
distinctions which are easy to circumvent through simple formulations and the use 
of different formulae by creditors - while this would not eliminate situations where 
creditors refuse to grant credit without also selling insurance coverage, it would 
open the door to more competition for insurance premiums. This is necessary 
because the same life insurance purchased separately from a consumer credit 
contract is usually lower in price. Separate life insurance would also have the 
advantage that it could be used for subsequent credit contracts and other 
purposes without fees for age progression. Creditors should be persuaded to 
disclose to consumers the possibility of separate insurance coverage instead of 
overcharging for linked credit life insurance contracts. 
64 Empirical surveys in Germany have revealed that instalment banks and finance 
companies offering credit for low income consumers insure up to 98% of the credit 
contracts while savings banks showed a rate of less than 5%. Credit life insurance is 
therefore mostly an additional security required by the creditor from low income 
consumers and offers the bank additional "interest" because insurance companies pay up 
to 3.5% as a brokerage fee to the bank 
30 
111. At the meeting with governmental experts in April 1995 to discuss this 
subject65, the experts reported on the situation in their Member States with regard 
to the elements of cost to be included in the calculation included in their national 
legislation. Some experts explained the reasons why their Member States had 
gone further than the Directive, or that the intent of their legislation was the same 
even if the wording used differed, and some clarifications of certain aspects were 
given. Following this meeting and the results of the study by Professor 
Seckelmann, it was felt that Member States include almost the same elements in 
their calculations and that any differences that do exist are minimal in nature. The 
Commission does not therefore propose, at this stage, to amend the list of 
elements of cost to be included in or excluded from the calculation of annual 
percentage rate of charge. 
65 Paragraph 6 supra 
31 
V. Other issues 
112. While the Directive requires an evaluation and a report which "...will make it 
possible, in the light of experience, to apply a single Community mathematical 
formula..."66, this requires an examination of other issues than the mathematical 
formula alone, in order to define a uniform application of the formula67. 
1. The Denomination of the annual percentage rate of charge 
113. The Directive does not regulate the multitude of interest rates or parameters 
with which, according to the principle of freedom of contract, lenders define how 
they calculate the credit costs internally. The only legally defined parameter for 
credit cost is the annual percentage rate of charge, presupposing either a special 
form of disclosure68 or a homogeneous denomination. 
114. The table below indicates that there are almost as many denominations as 
there are Member States. 
66 
67 
68 Article 1a(5)(b) of Directive 87/102 
While Article 14 of the Directive specifically mentions the "distribution of the amount of 
credit over several agreements", other circumventions occur. On several occasions, the 
German Bundesgerichtshof has ruled that the combination of capital life insurance and 
consumer credit can be transformed into one single credit with one single APR in order to 
find out whether it is usurious. Another circumvention is the combination of savings and 
credit where the consumer is required to save an amount equal to the sum of the credit in 
a special account (e.g. a whole life insurance account or even an instalment savings 
account). The credit is not reduced and only at the end are the savings used to repay the 
credit in one single instalment. Interest is due on the total amount of credit from the 
beginning to the end of the life span. The savings have earned much less interest than is 
to be paid on the credit, but the consumer has had to use the money for low-interest 
savings instead of repaying the high-interest credit. Such combinations can also be 
easily transformed into one credit relationship, with the EC formula applied to the total of 
all payments either on the credit or the savings. In such cases, the true APR is normally 
at least 1% higher than the disclosed APR. The problem posed by such combinations 
should be studied. 
US legislation prescribes a special form sheet wherein the APR has to be disclosed in a 
defined area 
32 
B 
DK Short form 
Taux d'intérêt 
effective/ Effektieve 
Rentevoet 
E. Rentefod Denomination 
taux annuel effectif 
global/ jaarlijkse 
kostenpercentage 
arlige omkostninger i 
procent English Translation 
global effective annual 
rate/ annual cost 
percentage 
annual costs in percent 
D E. Zinssatz and, less 
often, E. Zinsfuss effektiver Jahreszins or 
anfânglicher effektiver 
Jahreszins effective annual interest 
or initial effective 
annual interest 
EL 7T.€7rt TOK L O, P. 
Epitokio errjoLo TT pay[lot r i KO 
CTTLTOKLO (EnE), etisio 
pragmatiko epitokio, 
(EPE) annual effective interest 
rate 
ES Tipo de interés E. tasa anual équivalente + 
porcentaje anual de 
cargas financieras annual equivalent rate + 
annual percentage of 
financial burden (tipo 
de interés E.) 
Taux d'intérêt E. taux effectif global global effective rate 
IR E. Interest Rate annual percentage rate 
of charge, (APR) also annual percentage 
rate 
IT Tasso D'intéressé E. tasso annuo effettivo 
globale, (TAEG) global effective annual 
rate 
Taux D'intérêt E. taux annuel effectif 
global global effective annual 
rate 
NL E. Rentevoet effektief 
kredietvergoedingsperce 
ntage (op jaarbasis) effective credit 
remuneration per­
centage (on the basis 
„year") 
O E. Zinssatz (dekursiver) effektiver 
and fiktiver Jahres-
zinssatz (decursive) effective 
and fictitious annual 
interest rate 
Taxa de Juro E. taxa anual de encargos 
efectiva global, (TAEG) global effective annual 
rate of burden 
SF Todellinen vuosikorko 
/ effectiv rànta todellinen vuosikorko / 
effectiv rànta effective annual interest 
SV Eff. ranta effektiv rânta effective interest 
UK E. Interest Rate annual percentage rate, 
(APR) also annual percentage 
rate of charges, (APRC) 
ISL none ârleg hlutfallstala 
kostnaôar annual percentage rate 
of costs 
LI Effektive Jahreszins effective annual interest 
N E. Rente effektiv rente effective interest 
33 
115. The common elements are 
"Rate" 
The majority of Member States of the European Community and the other 
members of the EEA use the term "rate"69 
"Annual" 
Except for France, Sweden and Norway70, other Member States use the 
term "annual". This is particularly important as France, for instance, still 
uses monthly or quarterly rates. 
"Effective" 
With the exception of Denmark, Spain, Ireland, the United Kingdom and 
Iceland, the majority of the Member States use this term. This 
distinguishes between other interest rates used by lenders. 
116. As regards other terms found in some Member States, not all Member 
States include the concept of "interest" or "charge" in their term. Of those that do, 
Member States are fairly equally divided between those which refer to the result of 
the calculation (the interest rate)71 and those who prefer to refer to what it 
represents (the rate of charge)72. The inclusion of either term does not add 
significantly to the transparency of the term. 
117. While some Member States do use the term "Percentage"73, it is so 
common as to be understood and the inclusion of the word does not add 
significantly to transparency. It should be noted, in any event, that the use of the 
term "percentage rate" is no substitute to providing accurate information to 
consumers. 
118. Those elements which are most important for the transparency of the term 
are therefore those found in the Belgian, Greek, Italian, Luxembourg, Austrian and 
Portuguese terms i.e. "Rate", "Annual" and "Effective"74. 
69 
70 
71 
72 
73 
74 With the exception of Denmark, Germany, Netherlands, Finland, Sweden and Norway. 
However, it should be noted that Germany uses both the term "interest" and "interest 
rate" and the exclusion of the word "rate" seems to be language-specific. The Directive 
itself uses both terms and therefore those States which transcribed the Directive exactly 
should be considered as using the term "rate". 
In Norway, the term is, by its legal definition, an annual interest 
Denmark, Greece, Austria, Finland, Sweden, Norway 
Belgium, Spain, Ireland, Portugal, United Kingdom, Iceland 
Belgium, Denmark, Spain, Ireland, Netherlands, United Kingdom, Iceland 
The original 1979 Commission proposal used the terms "Effective Annual Rate of 
Interest", "Taux Annuel Effectif Global" and "Effektiver Jahreszins". While different 
terms, proposed by the European Parliament, were accepted in the 1983 Amended 
Proposal: "Annual Percentage Rate of Charge", "Taux annuel des frais" and "Jâhrlicher 
Belastungssatz", these later reverted to the original terms. By the time discussions 
reached the Council Working Group, the original French and German terms were again 
used, as also in the final version of the Directive. The term in the English language 
34 
119. An additional feature, found in the French language version of the Directive, 
and presently used by Belgium, France, Italy, Luxembourg, and Portugal is the 
word "global". This word adds considerably to the transparency and 
comprehension of the term for the average consumer as it indicates that the 
totality of the costs to be paid are contained in the annual percentage rate of 
charge 
120. The fact that the wording used to translate the original term (taux annuel 
effectif global) differs from one Member State to another and is often different in 
its literal meaning, has led to problems in practice because some of the 
denominations used in one country to denominate a certain "rate" are sometimes 
used in other countries to denominate other, different "rates". It would therefore 
be useful if some homogeneity and transparency could be achieved in order to 
assist in consumer comprehension. However, bearing in mind that much effort 
has been expended in communicating to consumers the meaning of the terms 
presently used in each Member State, it does not seem appropriate to propose a 
change in the wording used in the different languages. Nevertheless, it is 
desirable that a common feature be included in order to enable consumers, 
particularly in crossborder situations, to recognise these terms as being equivalent 
to those in use in their own Member States. Following discussions with 
governmental experts it was felt that, rather than proposing that the different terms 
used in the different national legislation for "annual percentage rate of charge" be 
harmonised, and in accordance with the principles of proportionality and 
subsidiarity, a common feature should be included in order to enable consumers 
to recognise these terms as being equivalent to the one in use in their own 
Member State. Following discussions with government experts, and in 
accordance with the principles of proportionality and subsidiarity, it is proposed 
that the use of a symbol in addition to the existing term will be required. This 
symbol will be identical in each Member State. This will not constitute a change 
in the language of the term and will only involve a small additional cost for 
transposition. 
2. Accuracy 
121. The Directive does not define the degree of accuracy required in the 
calculation of annual percentage rate of charge. The examples given in Annex III 
presuppose that Member States may prescribe an accuracy of one or two decimal 
places. It thus seems clear that the Directive demands at least accuracy to one 
decimal place. 
122. Most countries in fact demand accuracy to one decimal place. This, 
however, can make consumer credit contracts for ECU 20,000 over 60 months 
look equivalent although they may actually differ in cost by about ECU 50 (5 * 
0,0999 * 20,000/2 = 49.99). As the scope of consumer credit legislation in many 
Member States covers much higher amounts and longer terms, the difference may 
be up to ECU 500. In those Member States which include mortgage credit in the 
version alternated between "effective annual rate of interest" and "annual percentage rate 
of charge" up until the final draft of the Directive. 
35 
scope of the Directive, the difference may amount to several thousand ECU. 
Such a discrepancy is not tolerable. 
123. More accuracy should therefore be required for higher amounts of credit. At 
least two decimal places should be prescribed (though with the possibility of 
allowing one decimal place if one decimal represents costs of less than ECU 50). 
3. Time definitions 
124. Different definitions of time are in use in the Member States. The Directive 
implicitly states that all calculations should be made with daily correctness 
((Remark b) of Annex II). It also states that intervals "shall be expressed in years 
or in fractions of a year"75. This assumes that a day, week or month can be 
expressed in a constant fraction of a year. 
Practice of APR rules 
nominal 
Interest 
B 
DK 
D 
EL 
ES 
F 
IR 
IT 
L 
NL 
O 
P 
SF 
SV 
UK 
ISL 
LI 
N 365/52/12 
365 / 360 
360/ 12 
365/52/ 12 
365/ 12 
365/ 12 
365/52/ 12 
366 / 365 
365/ 12 
365/360/12 
360/12 
360/ 12 
365/52/ 12 
360 
360/ 12 — 
365.25 
360 
*~ 
365 
•<~~ 
«-
«-
366/365 
<-
360 
«-
— 
<-
«-
«-
— Comments 
12 months of different lengths 
Valuation is calculated for one day and converted 
to 365.25 days (4 year average) 
12 months of 30 days. 365 day year for certain 
transactions 
12 months of equal lengths. 360 day years for 
loans, 365 for savings 
Valuation is calculated for one month and 
converted to 365 days 
Valuation is calculated for a period and converted 
to 365 days. 12 months of equal days. 
12 months of equal lengths 
Each year equals the calendar year 
Actual months (28, 30, 31 days) 
12 months of 30 days. 360 days for savings and 
consumer loans, 365 for commercial loans 
Each year equals the calendar year 
12 months of 30 days 
12 months of equal length 
12 months of 30 days 
same as for nominal interest calculation 
75 Remark c of Annex II 
36 
125. As can be seen from the above table, which indicates practice in different 
Member States, most countries (except for Germany, Austria, Sweden, 
Liechtenstein and Norway) have already introduced the correct calendar into their 
calculations. For default interest, German banks also use the 365 day year. For 
annual percentage rate of charge calculation, Denmark, Luxembourg and Spain 
prescribe 365 day years while Germany, Austria and Liechtenstein prescribe 360 
day years. All other countries assume that the same year will be used as is used 
in nominal interest calculation. 
126. The differences in the results achieved through these variations are 
significant. For instance, a nominal interest rate of 18% p.a. for an open-ended 
credit used for one day gives an annual percentage rate of charge of 19.422% p.a. 
if calculated at 360 days a year, and gives 19.716% p.a. if calculated at 365 days 
a year76. 
127. There is no reason why calendar days should not be prescribed as the 
basis of a calculation while a year could generally be assumed to have 365 or 366 
days (or 365.25 days to take account of leap years, though the difference caused 
by the loss of one day every 4 years would not be significant enough to be noticed 
even with accuracy to two decimal places). Nor is there any need to compensate 
for a credit taken out in a shorter month. 
128. Annex II should therefore be amended to state that a year is presumed to 
have 365 or 366 days. 
76 The easiest way to do such calculations using computers is by using the calendar day 
because each computer has an inbuilt calendar. Calendar dates can be easily subtracted 
and the number of days defined. However, computers have extreme problems of 
definition when using the 360 day formula - a test of the relevant function in a popular 
spreadsheet program showed that their offer of a 360-day function is not correct because 
the sum of the days of 10 years differs by more than 10 days if calculated in one or in 
several intervals. A correct 360-day calculation is therefore impossible 
37 
VI. Conclusions and Recommendations 
129. There is a list in Annex 2 of the national legislation which transposed the 
Directive in the Member States of the European Community and the other 
members of the EEA. 
130. As regards the verbal definition of the annual percentage rate of charge, 
some amendments are required to the English and Greek language versions of 
the Directive. The proposed wording for the English version of Article 1a(1)(a) is 
as follows: 
The annual percentage rate of charge, which shall be that rate, on an 
annual basis, which equalises the present value of all commitments '(loans, 
repayments and charges), future or existing, agreed by the creditor and the 
borrower, shall be calculated in accordance with the mathematical formula 
set out in Annex II. 
and the proposed wording for the Greek version of Article 1a(1)(a) is as follows: 
"To OVVOXLKO erijoLO irporyiioiTLKO TTOOOUTO eiufiôtpvvorjç TTOV ettoûveL oe 
ETfjoLOi (Sacq TIÇ -notpovoeç oi£îeç TOV avvôXov TWV Tp£xov&ûv T) 
LieWovTLKÛV viïoxpeûoeuv (àaveîwv, eÇocpXficeuv KOLL eirifiotpvvoeuv) TIOV 
éxovv 0ivaXr]4>6e i airô TO ôave IOTT) non TO (ÔŒVe iÇô^ievo) KOLTOLVOIXUITT), 
viroXoyt ÇeTùtL oviiQuvot u.e TO uadrj^oiT L nô TVTTO TTOV -notpoLTiB eTOii OTO 
TTOipÔipTTJIKX II". 
131. It is proposed to require the use of a symbol in addition to the term currently 
in use in each Member State for the "annual percentage rate of charge". This 
symbol will be identical in each Member State. 
132. As far as the mathematical formula is concerned77, it is proposed, based 
on the arguments contained in this Report, that the formula in Directive 90/88 
should be retained and made general throughout the European Community and 
the other members of the EEA. Article 1a(5) should therefore be removed from the 
Directive as it will no longer be necessary. 
133. For the calculation, there should be a requirement of accuracy to two 
decimal places and a requirement to use a 365 or 366 day year. This will require 
amendment of the Annexes to the Directive. A correction would also have been 
necessary to the fourth example given in Annex III of the Directive to correct a 
77 For the mathematical aspects, see Professor Seckelmann's Study of the method of 
calculation of APR in EEA states - Footnote 6 supra 
38 
miscalculation78 but this has been overtaken by the recalculation of the examples 
on the basis of accuracy to 2 decimal places and the use of a 365 or 366 day 
year. 
134. Regarding the elements of cost to be included in the calculation, the 
transposition of the Directive by the Member States has led to a position where 
there is a harmonised minimum level of protection for all consumers throughout 
the European Community and the other members of the EEA in this respect. As 
Member States presently include almost the same elements in their calculation, 
and as any differences that do exist are minimal in nature, it is not proposed that 
the list of exemptions in Article 1a(2) should be amended at this time. 
135. In accordance with Article 1a(5)(b) of Directive 87/102, as amended by 
Directive 90/88, a draft Directive is being proposed. This will implement the 
changes recommended above79. 
136. As regards any other substantive elements of Directive 90/88/EEC, any 
proposals for amendments in this regard would be considered together with 
proposals for the amendment of the original Consumer Credit Directive 87/10280. 
78 
79 
80 A mistake was made in this calculation. The result should be 13.1855% according to 
spreadsheet calculation. This mistake in no way affects the correctness of the general 
formula, and the other examples are calculated correctly. 
It will also propose the deletion of Article 1a(3) of the Directive as this measure has not 
been availed of by any Member State. 
A Report on the operation of Directive 87/102 was published in May 1995 and the 
Commission is currently considering reactions to this Report. Any subsequent legislative 
proposal in this respect could include amendments to Directive 90/88. 
39 
Annex I - Articles 1 and 1a of Directive 87/102 
(as amended by Directive 90/88) 
Article 1 
1. This Directive 
agreements. applies to credit 
2. For the purposes of this Directive: 
(a) 'consumer' means a natural person who, 
in transactions covered by this Directive, 
is acting for purposes which can be 
regarded as outside his trade or 
profession ; 
(b) 'creditor' means a natural or legal person 
who grants credit in the course of his 
trade, business or profession, or a group 
of such persons ; 
(c) 'credit agreement' means an agreement 
whereby a creditor grants or promises to 
grant to a consumer a credit in the form of 
a deferred payment, a loan or other 
similar financial accommodation. 
Agreements for the provision on a 
continuing basis of a service or a utility, 
where the consumer has the right to pay 
for them, for the duration of their 
provision, by means of instalments, are 
not deemed to be credit agreements for 
the purpose of this Directive. 
(d) 'total cost of credit to the consumer' 
means all the costs, including interest and 
other charges, which the consumer has to 
pay for the credit. 
(e) 'annual percentage rate of charge' means 
the total cost of the credit to the 
consumer, expressed as an annual 
percentage of the amount of the credit 
granted and calculated in accordance with 
Article 1a. 
Article 1a 
(a) The annual percentage rate of 
charge, which shall be that 
equivalent, on an annual basis, to 
the present value of all 
commitments (loans, repayments 
and charges), future or existing, 
agreed by the creditor and the 
borrower, shall be calculated in accordance with the mathematical 
formula set out in Annex II. 
(b) Four examples of the method of 
calculation are given in Annex III, by 
way of illustration. 
2. For the purpose of calculating the annua! 
percentage rate of charge, the "total cost of the 
credit to the consumer" as defined in Article 
1(2)(d) shall be determined, with the exception 
of the following charges: 
(i) charges payable by the borrower for non­
compliance with any of his commitments 
laid down in the credit agreement; 
(ii) charges other than the purchase price 
which, in purchases of goods or services, 
the consumer is obliged to pay whether 
the transaction is paid in cash or by credit; 
(iii) charges for the transfer of funds and 
charges for keeping an account intended 
to receive payments towards the 
reimbursement of the credit the payment 
of interest and other charges except 
where the consumer does not have 
reasonable freedom of choice in the 
matter and where such charges are 
abnormally high; this provision shall not, 
however, apply to charges for collection of 
such reimbursements or payments, 
whether made in cash or otherwise; 
(iv) membership subscriptions to associations 
or groups and arising from agreements 
separate from the credit agreement, even 
though such subscriptions have an effect 
on the credit terms; 
(v) charges for insurance or guarantees; 
included are, however, those designed to 
ensure payment to the creditor, in the 
event of the death, invalidity, illness or 
unemployment of the consumer, of a sum 
equal to or less than the total amount of 
the credit together with relevant interest 
and other charges which have to be 
imposed by the creditor as a condition for 
credit being granted. 
3. (a) Where credit transactions referred 
to in this Directive are subject to the 
provisions of national laws in force 
40 
on 1 March 1990 which impose 
maximum limits on the annual 
percentage rate of charge for such 
transactions and, where such 
provisions permit standard costs 
other than those described in 
paragraph 2(i) to (v) not to be 
included in those maximum limits, 
Member States may, solely in 
respect of such transactions, not 
include the aforementioned costs 
when calculating the annual 
percentage rate of charge, as 
stipulated in this Directive, provided 
that there is a requirement, in the 
cases mentioned in Article 3 and in 
the credit agreement, that the 
consumer be informed of the 
amount and inclusion thereof in the 
payments to be made. 
(b) Member States may no longer apply 
point (a) from the date of entry into 
force of the single mathematical 
formula for calculating the annual 
percentage rate of charge in the 
Community, pursuant to the 
provisions of paragraph 5(c). N 
4. (a) The annual percentage rate of 
charge shall be calculated at the 
time the credit contract is 
concluded, without prejudice to the 
provisions of Article 3 concerning 
advertisements and special offers. 
(b) The calculation shall be made on 
the assumption that the credit 
contract is valid for the period 
agreed and that the creditor and the 
consumer fulfil their obligations 
under the terms and by the dates 
agreed. 
5. (a) As a transitional measure, 
notwithstanding the provisions of 
paragraph 1(a), Member States 
which, prior to 1 March 1990, 
applied legal provisions whereby a 
mathematical formula different from 
that given in Annex II could be used 
for calculating the annual 
percentage rate, of charge, may 
continue applying that formula 
within their territory for a period of 
three years starting from 1 January 
1993. only one mathematical formula for 
calculating the annual percentage 
rate of charge is used within their 
territory. 
(b) Six months before the expiry of the 
time limit laid down in point (a) the 
Commission shall submit to the 
Council a report, accompanied by a 
proposal, which will make it possible 
in the light of experience, to apply a 
single Community mathematical 
formula for calculating the annual 
percentage rate of charge. 
(c) The Council shall, acting by a 
qualified majority on the basis of the 
proposal from the Commission, take 
a decision before 1 January 1996. 
6. In the case of credit contracts containing 
clauses allowing variations in the rate of 
interest and the amount or level of other 
charges contained in the annual percentage 
rate of charge but unquantifiable at the time 
when it is calculated, the annual percentage 
rate of charge shall be calculated on the 
assumption that interest and other charges 
remain fixed and will apply until the end of the 
credit contract. 
7. Where necessary, the following 
assumptions may be made in calculating the 
annual percentage rate of charge: 
if the contract does not specify a credit 
limit, the amount of credit granted shall be 
equal to the amount fixed by the relevant 
Member State, without exceeding a figure 
equivalent to ECU 2 000. 
if there is no fixed timetable for 
repayment, and one cannot be deduced 
from the terms of the agreement and the 
means for repaying the credit granted, the 
duration of the credit shall be deemed to 
be one year. 
unless otherwise specified, where the 
contract provides for more than one 
repayment date, the credit will be made 
available and the repayments made at the 
earliest time provided for in the 
agreement. 
Member States shall take the 
appropriate measures to ensure that 
41 
Annex II 
National Legislation transposing Directive 90/88/EEC 
Further details on the national legislation can be found in the Report prepared by Professor 
Seckelmann on the Method of calculation of APR in the EEA States, available from DG XXIV. 
Belgium 
Transposing 
Legislation: 
Scope: 
Term used: 
Formula used: 
Elements of cost: Loi relative au crédit à la consommation / Wet op het 
consumentenkrediet 1991/1723 of 12.6.91, supplemented by Arrêté 
Royal relatif aux coûts ... du crédit à la consommation / Koninklijk besluit 
betreffende kosten ... van het consumentenkrediet 1992/2311 of 4.8.92, 
both of which have been amended since. 
Most kinds of credit (including mortgages and current accounts), 
marketing of credit, activities of intermediaries... Wider than the 
Directive, with limits on interest rates and lifespans of loans and specifies 
inadmissible terms 
Taux Annuel Effectif Global / Jaarlijkse Kostenpercentage 
Equivalent to EC formula 
Other: Insurance not excluded, 
but criterion is whether Open list of elements to be included. 
Same exemptions as in Article 1a2 
reasonable choice is given. 
Other legislation on the subject: 
Loi 1992/1833 of 6.7.92, Arrêté Royal / Koninklijk besluit 1992/2905 
(Errata) of 4.8.92, Arrêté Royal / Koninklijk besluit 1992/2312 of 4.8.92, 
Arrêté Royal / Koninklijk besluit 1993/1226 of 27.4.93, Arrêté Royal / 
Koninklijk besluit 1993/1381 of 29.4.93 
Denmark 
Transposing 
Legislation: 
Scope: 
Term used: 
Formula used: 
Elements of cost 
Other: Lov om kreditaftaler 1990/398 of 13.6.90 amended by Lov n* 322 of 
31.05.91, lov n* 284 of 29/04/92 and lov n° 226 of 06.04.94, 
supplemented by Bekendtgorelse n° 896 of 21.12.90 and Bekentsgorelse 
970 of 07.12.92and Bekendtgorelse n° 497 of 13.06.94; Lov om 
maerkning og skiltning med pris n° 395 of 13.6.90; and Bekendetgorelse 
n° 902 of 12.11.92 
Wider than the Directive - deals with real estate loans secured by 
mortgage (traded as bonds) 
ârlige omkostninger i procent 
EC formula 
Same exemptions as in Article 1a2 though more comprehensive 
(account and transfer costs are only exempted if consumer has 
reasonable choice and costs are not excessive) 
Other legislation on the subject: 
Lov 1991/456 of 17.6.91 amended by Lov 1994/429 of 1.6.94; 
Bekendtgorelse n° 322 of 31.05.91, n° 284 of 29.04.92, n° 226 of 
06.04.94, n° 1098 of 21.12.94, n° 970 of 07.12.92 and n" 1228 of 
21.12.92 
Germany 
Transposing 
Legislation: Erste VO (von 03.04.92) zur Anderung der Preisangabenverordnung (von 
14.3.85) 
42 
Scope: In some respects wider than the Directive, with regulations on default 
and intermediaries. 
Term used: effektiver Jahreszins or anfanglicher effektiver Jahreszins 
Formula used: Derogation in Article 1a5a - Staffelrechnung (cascade calculation) 
Elements of cost: Literal transposition, using the exemptions in article 1a2. Insurance 
which does not secure repayment is exempt, whether mandatory or 
not. 
Other: Other legislation on the subject: 
Article 609a BGB; Preisangabenverordnung of 14.3.85, 
Ausfuhrungshinweise zu §4 PAV of 18.12.92; Verbraucherkreditgesetz of 
17.12.90, amended 27.4.93 
Greece 
Transposing 
Legislation: Ministerial Decision 01-983 of 7.3.91 
Scope: As in Directive 
Term used: etisio pragmatiko epitokio 
Formula used: EC formula 
Elements of cost: As in Article 1 a2 
Other: Other legislation on the subject: 
Decision 1993/524 of the Committee of Money and Credit of the Bank of 
Greece, of 8.4.93; Acts of the Governor of the Bank of Greece n° 
1993/2213 of 15.6.93; n° 1993/2258 of 2.11.93; n° 1994/2286 of 28.1.94 
Spain 
Transposing 
Legislation: 
Scope: 
Term used: 
Formula used: 
Elements of cost 
Other: Ley de crédito al consumo 1995/7 of 23.3.95 and correction 12.5.87 
As in Directive, but interest rate and total cost must also be stated for 
mortgages. 
tasa anual équivalente and porcentage anual de cargas financieras 
Equivalent to EC formula 
All charges are included in the rate, including mandatory insurance 
charges (and non-mandatory insurance charges are not listed as 
exempted). 
Other legislation on the subject: 
Ley 1965/50 of 21.7.65; Orden Banco de Espana of 16.6.88, Ley 
1988/26 of 29.7.88; Orden 1989/303 of Min. Economia y Haciendas of 
12.12.89; Circular Banco de Espana 1990/8 of 7.9.90, n° 1993/13 of 
21.12.93 and 1994/5 of 22.7.94; Ley 1994/2 of 30.3.94, Orden Banco de 
Espana of 5.5.94; 
France 
Transposing 
Legislation: Directive 90/88 has not been transposed in France. 
Scope: 
Term used: taux effectif global 
Formula used: --
Elements of cost: By existing legislation, all charges are included in the rate 
Other: Other legislation on the subject: 
Loi 1966/1010 of 28.12.66, Loi 1978/22 of 10.1.78 amended by 1979/596 
of 13.7.79; Ordonnance 1986/71243 of 1.12.86; Loi 1988/15 of 5.1.88; 
Décret 1988/293 of 31.3.88; Loi 1989/1010 of 31.12.89; Loi 1992/60 of 
18.1.92; Décret 1985/944 of 8.9.85; Loi 1993/949 of 26.7.93; Décret n* 
1978/372 of 17.3.78, n* 1987/509 of 24.3.78; n" 1988/293 of 25.3.88; 
Loi 1995/125 of 8.2.95 
43 
Ireland 
Transposing 
Legislation-
Scope: 
Term used: 
Formula used: 1995 Consumer Credit Act, 28.7.95 
Wider than the Directive 
annual percentage rate of charge 
EC formula 
Elements of cost: Generally the same as Art. 1a2 
Other: Other legislation on the subject: 
Consumer Information (Consumer Credit) Order SI 1987/319 of 10.12.87 
Italy 
Transposing 
Legislation: Legge communitaria 1991/142 of 19.2.92; Decreto vista la legge 
1992/142 of 8.7.92 
Wider than the Directive - neither loans before notaries nor loans to be 
repaid by 4 instalments in 12 months are not exempted, and credit 
purchases are included. 
tasso annuo effettivo globale 
EC formula 
Elements of cost: As in Article 1a2. Open list of charges to be included 
Other: Other legislation on the subject: 
Legge 1992/154 of 17.2.92; Decreto on Legge 1992/154, 24.4.92; 
Instruzioni della Banca d'ltalia in attuazione della legge 1992/154, 
24.4.92; Legge in materia bancaria e creditizia 1993/385 Scope: 
Term used: 
Formula used. 
Luxembourg 
Transposing 
Legislation: 
Scope: 
Term used: 
Formula used: Règlement Grand-Ducal 26.8.93 
As in Directive but credit card accounts are treated the same as other 
accounts 
taux annuel effectif global 
EC formula 
Elements of cost: Same as in Article 1 a2 
Other: Other legislation on the subject: 
Loi 9.8.93; Avant-projet de règlement grand-ducal déterminant les 
modalités de calcul du montant de la réduction équitable du coût total de 
crédit 
Netherlands 
Transposing 
Legislation: 
Scope: 
Term used: 
Formula used: 
Elements of cost 
Other: Wet op het consumentenkrediet 4.7.90 Stb 1990/395 
Wider than the Directive and very detailed. Regulation of intermediaries 
and obligation on lenders to advise debtors. Maximum rates. 
effektief kredietvergoedingspercentage (op jaarbasis) 
Equivalent to EC formula 
Only 1a2(i) & (ii) are used. If account fees or insurance fees are 
obligatory, they are not exempted. 
Other legislation on the subject: 
Besluit n' 1991/515 and 1991/516 of 9.10.91; n° 548 of 17.10.91, n* 549 
of 16.10.91, n* 550 of 18.10.91; Regeling 1991/220 of 6.11.91; Regeling 
register vergunninghouders Stcr 1991/220 of 6.11.91 
44 
Austria 
Transposing 
Legislation: 
Scope: 
Term used: 
Formula used: 
Elements of cost 
Other: 
Portugal 
Transposing 
Legislation: 
Scope: 
Term used: 
Formula used: 
Elements of cost: 
Other: Bankwesengesetz BGBL n° 532 of 13.07.93 (Section VIII); 
Verbraucherkreditverordnung n° 110 of 13.05.93 
Wider than the Directive in some respects. No form of credit exempt -
applies to real estate loans, mortgages and loans of any amount or 
duration. Certain leasing transactions also seen as being equivalent to 
hire-purchase. 
(dekursiver) effektiver and fiktiver Jahreszinssatz 
Equivalent to EC formula 
Only 1a2(i) & (iii) are used. Insurance is included if mandatory. 
360 day year used 
Other legislation on the subject: 
Konsumentenschutzgesetz 1979/140 of 8.3.79, amended by 1993/247 of 
16.4.93; Konkursordnungsnovelle 1993/974; Gewerbeordnung 1994/194 
Decreto-Lei 1991/359 of 21.9.91 
Wider than the Directive in the range of credit covered. Mortgages not 
covered. 
taxa anual de encargos efectiva global 
EC formula 
Same as in Article 1a2. Intermediaries' costs included. 
Finland 
Transposing 
Legislation: Kuluttajansuojalaki / Konsumentskyddslag 1978/38 of 20.1.78, as 
amended by 1986/385 of 23.5.86, 1993/85 of 8.1.93 and 1994/16 of 
5.1.94: Asetus / Fôrordning 1993/1602 of 30.12.93 as amended by 
1994/16 of 1.7.94 
Wder than the Directive - includes loans to buy homes and mortgages. 
todellinen vuosikorko / effektiv rànta 
Derogation in Article 1a5a. Formula: Decision of Ministry of Trade and 
Industry on the application of certain provisions in Chapter 7 of the 
Consumer Protection Act (1986/874 of 30.06.86 as amended by 
1994/661) 
Elements of cost: All charges, except for non-mandatory insurance, are included 
Other: Other legislation on the subject: 
Luottolaitoslaki / Kreditinstitutslag 1993/1607 of 30.12.93 Scope: 
Term used: 
Formula used 
Sweden 
Transposing 
Legislation: 
Scope: 
Term used: 
Formula used: 
Elements of cost. 
Other: Konsumentkreditlag 1992/830 
Wder than the Directive - covers all forms of loans, including mortgages 
and those connected with credit-purchases and current accounts 
effectiv rànta 
EC formula 
All charges are included (no exemptions are listed though in practice 
those in the Directive are used). Insurance is not mentioned but if 
it is mandatory, must be included. 
Other legislation on the subject: 
Guidelines 1992/4 for the application of Konsumentendreditlag 1992/830; 
Executive Order 1992/1010 of 22.10.92 
45 
United Kingdom 
Transposing 
Legislation: 
Scope: 
Term used: 
Formula used Consumer Credit Act 1974; The Consumer Credit 
(Agreements)(Amendments) Regulation Statutory Instrument 1984/1600 
of 22.10.94 
More comprehensive than the Directive 
annual percentage rate of charge 
Equivalent to EC formula 
Elements of cost: As in Article 1a2. All mandatory costs included. 
Other: Other legislation on the subject: 
Consumer Credit Act 1974; The Consumer Credit Regulations - Statutory 
Instruments 1980/51 of 29.1.80, 1983/1553 of 3.11.83, 1983/1562 of 
3.11.83, 1983/1564 of 3.11.83, 1985/1192, 1989/596 of 14.4.89; 
1989/869 of 24.5.89; 1989/1125 of 6.7.89; 1989/1126 of 6.7.89 
Iceland 
Transposing 
Legislation: 
Scope: 
Term used: 
Formula used: 
Elements of cost 
Other: Log urn neytendalan 1993/30, amended by 101/1993 - consolidated in 
Log urn neytendalan 1994/121 of 21.9.94 
Hirepurchase and leasing agreements are included 
ârleg hlutfallstala kostnaôar 
EC formula 
As in Article 1a2. All costs, including non-mandatory insurance, are 
included. 
Other legislation on the subject: 
Regulgerô 1993/377 of 3.9.93 and Regulgerô 1993/491 of 3.12.92 
Liechtenstein 
Transposing 
Legislation: Gesetz vom 22 Oktober 1992 ùber den Konsumkredit 
(Liechtensteinisches Landesgesetzblatt 1993 n°50 von 9/3/93) 
Effektiver Jahreszins 
EC formula 
Elements of cost: As in Article 1a2 
Other: 360 day year used Term used: 
Formula used: 
Norway 
Transposing 
Legislation: 
Scope: 
Term used: 
Formula used: 
Elements of cost 
Other: Lov om kredittkjop 1985/82 of 21.6.85 as amended; Forskrift til 
kredittkjopsloven 1986/1616 of 15.7.86; Forskrift 1990/437 of 1.6.90 
Narrower than the Directive in that it only covers purchase credit, but 
wider in that only immovable property is exempt - covers more than 
consumer purchases, covers wider range of current accounts, 
effectiv rente 
EC formula (to be implemented in 1996) 
As in Article 1a2 
Other legislation on the subject: 
Lov om finansieringsvirksomnet og finansinstitusjoner 1988/40 and 
amendment 4.12.92 
46 
Annex III 
For the references to the German and French formulae, see footnotes 46 and 50 
respectively. 
Formula used for calculating APR in Finland: 
Single Credits: 
12x200xR 
P= 
K x (T + L) 
in which 
P= APR 
R = the amount of total costs 
K = the amount of initial loan 
T = repayment period expressed in months 
L = the interval between repayments expressed in months 
Current Accounts: 
100 x yearly credit costs 
P = 
typical amount of credit 
[Provided by the Consumer Ombudsman's Office, Finland] 
47 
EXPLANATORY MEMORANDUM 
Background - Directives 87/102/EEC and 90/88/EEC 
1. In 1975, the Council adopted the Preliminary Programme of the European 
Economic Community for a consumer protection policy\ in which they 
emphasised the fundamental nature of the consumer's right to protection of 
their economic interests, and urged that priority be given, inter alia, to the 
adoption of measures at Community level to harmonise the general conditions 
of consumer credit. The Commission's original proposal on consumer credit2 
was amended3, following Parliament's suggestions, to provide for the 
establishment of a uniform method for the calculation of the annual percentage 
rate of charge for credit. 
2. The Council adopted Directive 87/102/EEC4 for the approximation of the laws, 
regulations and administrative provisions of the Member States concerning 
consumer credit, on 22 December 1986. The ninth recital and Article 5 of 
this Directive provided for the introduction of a Community method or methods 
of calculating the 'annual percentage rate of charge' for credit. However, as 
the elaboration of a common formula for the calculation of the 'annual 
percentage rate of charge', and the elements to be includea in this calculation, 
had proved contentious, Directive 87/102 stated that, "pending a decision on 
a Community method or methods of calculating the 'annual percentage rate of 
charge', Member States should be able to retain existing methods or practices" 
and that the "total cost of credit to the consumer" (Article 1.2d) and the 'annual 
percentage rate of charge' (Article 1.2e) should be determined and calculated 
in accordance with the provisions, practices and methods existing in the 
Member States. 
3. Following discussions with government experts, the Commission presented a 
proposal for a Directive5. The European Parliament6 and the Economic and 
Social Committee7 recommended the regulation not only of the mathematical 
aspects but also of the elements of cost to be included in the calculation. As 
most Member States were willing to adopt the actuarial method of calculation 
and were also willing to deal with the elements of cost to be included, an 
1 OJ C 92 25.04.75 
2 OJ C 80 27.03.79 p.4 
3 OJ C 183 10.07.84 
4 OJL 42 12.2.87 
5 OJ C 155 14.6.88 p. 10 
6 EP Report A2-418/88 of 06.03.89; EP Resolution of 15.03.89 
7 ECOSOC Opinion, OJ C 337 31.12.88 p.1 
<h 
amended proposal dealing with both aspects was presented in 19898. 
4. Directive 90/88/EEC was adopted on 22 February 1990 and introduced a 
Community method of calculating the 'annual percentage rate of charge' for 
consumer credit and defined the credit cost items to be used in the calculation 
by indicating those costs which were not to be taken into account. All 
Member States9 were to ensure, at least, that only one mathematical formula 
for the calculation was in use in their territory for that purpose. 
5. For a transitional period until 1 January 1996, those Member States which, on 
a legislative basis, used a different mathematical formula for the calculation of 
the 'annual percentage rate of charge' (prior to 1 March 1990) were permitted 
to continue to do so10. 
6. Article 1a(5)(b) of Directive 87/102 (as added by Directive 90/88) requires the 
Commission to present to the Council "a Report, accompanied by a proposal" 
which will make it possible to apply a single Community mathematical formula 
for calculating the 'annual percentage rate of charge'. 
7. The Commission has prepared a Report on the operation of Directive 90/8811 
which explains in more detail the reasons for the proposals for amendment 
presented below. This Report is based on a study prepared by a consultant 
expert in financial mathematics12, on studies of the transposition of the 
Directive into domestic law13 and, particularly, contacts with government 
experts14. 
8. While Article 1a(5)(c) states143 that the Council shall, acting on the basis of the 
Commission's proposal, "take a decision", this is not a 'Decision' as defined 
by Article 189 of the Treaty but rather, since its objective would be to require 
Member States to change their laws, a Directive. This interpretation is in 
OJC 155 23.06.89 p.4 
9 
10 
11 
12 
13 
14 
14a Directive 90/88 was incorporated into the Agreement on the European Economic Area (EEA) 
and the Report (see footnote 11 infra) therefore covers Iceland, Liechtenstein and Norway as 
well as the 15 members of the European Union 
Article 1a(5)(a) of Directive 87/102 (as added by Directive 90/88) 
COM(96)79 
Professor Seckelmann has prepared a study on the Methods of calculation in the European 
Economic Area of the Annual Percentage Rate of Charge (available from DG XXIV) 
Footnote 3 of COM(95)117, Report on the operation of Directive 87/102/EEC on the 
approximation of the laws, regulations and administrative provisions of the Member States 
concerning consumer credit 
Meetings were held in Brussels in April 1995 and January 1996, with continued direct contacts 
in the intervening months. 
The French and Italian versions of the Directive do not refer to a "decision" 
Eto 
accord with that previously given to Article 5 of Directive 87/102 which referred 
to a 'decision' on the introduction of a Community method - the method was 
in fact introduced by a Directive (Directive 90/88/EEC). 
Proposals for the amendment of Directive 87/102 (as amended by Directive 
90/88): 
9. As has been explained in more detail in the Report on the operation of 
Directive 90/8815, there are almost as many denominations for the Annual 
Percentage Rate of Charge in use as there are Member States. 
10. For the same reasons that it is desirable, in order to ensure the proper 
functioning of the Internal Market and to ensure a high level of protection of 
consumers, that one single method be used for the calculation of the annual 
percentage rate of charge be used throughout the European Community and 
the other members of the EEA, it is also desirable that consumers should be 
able to recognise the terms used in other Member States to indicate this rate. 
For this reason, in the interests of transparency and of increased 
comprehension by consumers, it is desirable that a common feature be 
included in order to enable consumers to recognise these terms as being 
equivalent to the one in use in their own Member States. Following discussions 
with government experts, and in accordance with the principles of 
proportionality and subsidiarity, it is not proposed to suggest the harmonisation 
of the different terms in the different languages, but rather to require the use 
of a symbol in addition to the existing term in all consumer credit 
advertisements and written agreements with consumers. This symbol will be 
identical in each Member State. This will entail the amendment of Article 3 
and 4(2) of Directive 87/102 (as amended by Directive 90/88) in order to require 
the use of a sumbol in addition to the existing term "annual percentage rate of 
charge" in all consumer credit advertisements and written agreements with 
consumers. 
11. In order to harmonise the different existing language versions of the Directive, 
the amendment of Article 1a(1)(a) in the English and Greek language 
versions of the Directive is required16. The article will now read as follows 
(identical to the French language version): 
The annual percentage rate of charge, which shall be that rate, on an 
annual basis, which equalises the present value of all commitments 
(loans, repayments and charges), future or existing, agreed by the 
creditor and the borrower, shall be calculated in accordance with the 
mathematical formula set out in Annex II. 
15 
16 Paragraphs 113 - 120 of the Report 
This amendment has been discussed with and agreed by Ireland and the United Kingdom (as 
far as the words "that rate... which equalises" are concerned). 
5Ï 
and the proposed wording for the Greek version of Article 1 a(1)(a) is as follows: 
"TO OVVOXl KÔ €TT)0~ LO 1TpOty\JaT L KO 1TOOOOTÔ 6 7T L (Sap V V 07] Ç ITOU 6 £ LOù3V€ L 
oe eTf\o'ioL (3aorj TLÇ irocpovoeç a£ieç TOV ovvôXov TWV rpexouoûv f) 
^eXXovTLKù)vviToxpeù)oeix)v(ôoiveiG)v, eCocfrXijoeuv KŒL eir L(3ocpv voeuv) 
TTOV éxovv otvotXr)<fid et airô TO ôaveLUTf) non TO (ôave i f ope vo) 
KOLTOLVOlXbiTT), VÏÏOX OJ L f 6 TOL L O V P0W V 01 Ue TO \lŒÔ T]\l0LT L K. O TV1TO TTOV 
•ïïOtpOLT L de TOtl OTO 7TOL p Ôt p T7][\a. II". 
12. Article 1a(3) of the Directive permitted Member States who had national laws 
in force on 1 March 1990 which imposed maximum limits on the annual 
percentage rate of charge and which excluded costs other than those referred 
to in Article 1a(2), to continue to rely on these provisions (provided that the 
consumer is informed of these charges). As no Member State has made use 
of this possibility, it is appropriate to delete Article 1a(3). In any event, it 
would be necessary to delete this Article once the formula was confirmed as 
proposed by the present proposal for a Directive. 
13. As has been demonstrated in the Report on the Operation of Directive 
90/88/EEC, the formula contained in Annex II of the Directive is completely 
correct and should be confirmed throughout the European Economic Area. 
This will entail the replacement, in Germany, France and Finland, of the 
formulae presently in use. Neither the German nor the French formulae use 
exponential calculation, resulting in a situation where neither can apply a one 
year compounding period for all circumstances. The main differences in 
relation to the German formula17 relate to short term credit, a form increasingly 
used e.g. credit cards. Indeed, some German banks already use the EC 
formula for calculating rebates because the older system is inapplicable in 
cases of unequal instalments. With the French18 formula, the monthly rate is 
converted to an annual rate by multiplying by twelve. This is misleading as it 
is not based on an annual compounding period and thus leads to very 
significant differences with the EC formula. French consumer credit contracts 
thus appear artificially more favourable to consumers than those of other 
Member States. While the German system is mathematically inconsistent and 
creates artificial differences in calculations, it has only modest effects on most 
ordinary instalment credit. The French system deviates so significantly as to 
mislead not only non-French consumers but also French consumers. 
14 As an example, in a loan of 1000 ECU, with 10 ECU interest each month, the 
following results are achieved using the different formulae: 
17 See paragraphs 64-75 of the Report on Directive 90/88 
18 See paragraphs 76-81 of the Report on Directive 90/88 
5X 
Term 
(months) 
6 
12 
18 
24 
48 Cost 
60 
120 
180 
240 
480 German method 
21.49 
24.66 
24.27 
24.34 
23.09 EC method 
22.29 
23.70 
24.00 
23.84 
22.86 French method 
20.29 
21.46 
21.65 
21.58 
20.75 
The German deviation is signficant for periods of less than one year while the 
French deviation is more general and serious. 
15 The advantages of the EC formula19 are that mathematically, the use of a single 
formula is the only way to guarantee that the price represents equal conditions; 
that it enables consumers to shop across borders in the Single Market; that it 
simplifies the legal framework for consumer credit in different Member States 
and promotes consistency in the national transposition measures. Production 
costs for software companies and financial institutions will be reduced due to 
the economies of scale provided by the use of a single formula throughout the 
Single Market. The potential cost of adapting computer programmes and price 
structures to handle the EC formula is not a striking argument as banks in 
those Member States which already use the formula have already made this 
investment. Those banks that will now be obliged to change frequently adapt 
their programmes to take account of case law and administrative rules on the 
subject and, in addition, already use the EC formula for some (internal) 
calculations. 
16. It is therefore necessary to delete Article 1a(5), the Article which provided a 
derogation until 31 December 1995 (used by Germany and Finland) to those 
Member States who wished to retain a different method for the calculation of 
the annual percentage rate of charge. As has been demonstrated in the 
Report on the Operation of Directive 90/88/EEC, the formula contained in 
Annex II of the Directive should be confirmed throughout the European 
Community and other members of the EEA. As a result, Article 1a(5)(a) (the 
derogation), Article 1a(5)(b) (the reference to the Report and this legislative 
proposal) and Article 1a(5)(c) (the reference to the decision to be taken by the 
Council), are no longer necessary and should be deleted. The 
confirmation of the formula contained in Annex II will entail changes in the 
legislation presently in force in Germany, France and Finland. 
17. Linguistic changes have also been proposed to the wording of the definitions 
in Annex II in certain language versions - namely Spanish, French and Dutch. 
18. While the Directive does not at present define the degree of accuracy required 
19 See paragraphs 82 - 93 of the Report on Directive 90/88 
55 
in the calculation of the annual percentage rate of charge, the examples in 
Annex III presuppose accuracy to at least one decimal place. Most Member 
States require accuracy to at least one decimal place. As the scope of many 
Member States'consumer credit legislation covers higher amounts and longer 
terms than in the Directive, the differences as a result of the level of accuracy 
become important, especially in those Member States which include mortgage 
credit in the scope of their legislation. It is therefore necessary that 
accuracy to two decimal places should be required (though accuracy to one 
decimal place could be allowed where the difference is less than ECU 50). 
This would also entail amendment of Annex II and of the examples in Annex 
19. The Directive states in Annex II that intervals shall be expressed in "years or 
in fractions of a year". This dates from the pre-computer era when, for ease 
of calculation, a year was defined as having 12 equal months, 52 weeks and 
360 days. Compounding periods were likewise set at full months or years in 
order to make end-of-year calculations possible. This leads to situations where 
the 31st day of some months is ignored and 2 days are added to February in 
order to arrive at 12 equal 30 day months. In practice, most Member States 
(with the exception of Germany, Austria, Sweden, Liechtenstein and Norway) 
have introduced the correct calendar into their calculations. Even in those 
Member States, the correct calendar year of 365 days is used for certain 
calculations. Use of a 365 day year is, moreover, in conformity with computer 
programmes all over the world - computers automatically calculate on the basis 
of a 365 day year and the number of days in a given time period. As the 
differences in the rates for credit calculated on a 360 day year and a 365 day 
year can be significant, it is necessary that Annex II should be amended to 
state that a year is presumed to have 365 or 366 days20. This would also 
entail amendment of Annex II and of the examples in Annex III. 
20. This proposal would, in practice, only affect Germany, Austria, Sweden, 
Liechtenstein and Norway, who presently use a 360 day year in their 
calculations. 
21. A miscalculation in the fourth example in Annex III also needed correction -
instead of 13.21% the answer should have been 13.1855 or 13.19%. This 
correction has, however, been overtaken by the recalculation of the examples 
on the basis of accuracy to 2 decimal places and the use of a 365 or 366 day 
year. 
22. No proposals are put forward at this time concerning the list in Article 1a(2) of 
the Directive (the elements of cost to be excluded from the calculation of the 
annual percentage rate of charge) as most Member States include the same 
elements and such differences as do exist are minimal in nature. As regards 
amendment of any other substantive elements of Directive 90/88/EEC, any 
20 While Denmark uses a year of 365.25 days, averaged over 4 years, in order to take account 
of leap years, this is not proposed for the Directive as the difference would not be significant 
enough to be noticed in a calculation which uses accuracy to 2 decimal places. 
9i 
proposals in this regard would be considered together with proposals for the 
amendment of the original Consumer Credit Directive, Directive 87/102/EEC21. 
Legal situation pending the adoption of the proposed Directive 
23. As a result of changed circumstances following the enlargement of the 
European Union to include Austria, Finland and Sweden, and the delayed 
transposition of Directives 87/102 and 90/88 by certain Member States, the 
Commission was unable to present the Report and proposal mentioned in 
Article 1 a(5)(b) by 1 July 1995, and the Council and Parliament were unable to 
adopt the proposed draft Directive by 1 January 1996. 
24. Article 1a(5)(a) of Directive 87/102 permitted Member States, as a transitional 
measure, to continue to apply legal provisions for the calculation of the global 
annual effective rate different to those in the Directive for a period of three 
years starting from 1 January 1993 (i.e. until January 1 1996). The 
Commission interprets Article 1a(5)(b) as an implicit prolongation of this period 
until the adoption of the Directive referred to in Article 1a(5)(c). Germany, 
France and Finland may therefore continue to apply existing legal provisions 
different to those in Annex II of Directive 87/102 until the adoption of the 
proposed Directive. 
21 A Report on the operation of which was published in May 1995 [COM(95)117 of 11.05.95], 
reactions to which are currently under consideration by the Commission. Any subsequent 
legislative proposal in this respect could include amendments to Directive 90/88. 
55 
DIRECTIVE 96/ OF THE EUROPEAN PARLIAMENT AND THE COUNCIL 
of 1996 
amending Directives 87/102 (as amended by Directive 90/88) for the 
approximation of the laws, regulations and administrative provisions of the 
Member States concerning consumer credit 
THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, 
Having regard to the Treaty establishing the European Community, and in particular 
Article 100a thereof, 
Having regard to the proposal of the Commission1, 
Having regard to the opinion of the Economic and Social Committee2, 
Acting in accordance with the procedure laid down in Article 189b of the Treaty3, 
Whereas it is desirable, in order to promote the establishment and functioning of the 
internal market and to ensure that consumers benefit from a high level of protection, 
that one method of calculating the annual percentage rate of charge should be used 
throughout the European Community, 
Whereas Article 5 of Council Directive 87/102/EEC4 provides for the introduction of a 
Community method or methods of calculating the annual percentage rate of charge 
for consumer credit; 
Whereas, in order to introduce this single method, it is desirable to draw up a single 
mathematical formula for calculating the annual percentage rate of charge and for 
determining the credit cost items to be used in the calculation by indicating those costs 
which must not be taken into account, 
Whereas Annex II of Directive 90/88/EEC (5) introduced a mathematical formula for 
the calculation of the annual percentage rate of charge and Article 1.2 of Directive 
90/88 provided the charges to be excluded from the calculation of the 'total cost of 
credit to the consumer', 
Whereas during a transitional period of three years from 1 January 1993, Member 
States which prior to 1 March 1990 applied laws which permitted the use of another 
mathematical formula for calculating the annual percentage rate of charge, were 
permitted to continue to apply such laws, 
4 
5 OJ n° L42 12.2.87 p. 48 
OJ L61 10.3.90 p. 14 
5f 
Whereas the Commission has submitted a Report to the Council (6) which makes it 
possible, in the light of experience, to apply a single Community mathematical formula 
for calculating the annual percentage rate of charge, 
Whereas no Member State has made use of Article 1a(3) of the Directive by which 
certain costs were excluded from the calculation of the annual percentage rate of 
charge in certain Member States, it has become obsolete, 
Whereas accuracy to two decimal places and the use of a 365 or 366 day year is 
necessary, 
Whereas it is desirable that consumers should be able to recognise the terms used 
in different Member States to indicate the 'annual percentage rate of charge', and that 
the use of a common symbol, in addition to the existing term, should be mandatory 
in all consumer credit advertisements and written agreements with consumers 
throughout the European Community, 
HAVE ADOPTED THIS DIRECTIVE: 
COM(96)79 
3 
Article 1 
Whenever the term "annual percentage rate of charge", or the equivalent term in another 
Community language, is used as required by Directive 87/102, it shall be accompanied by the 
following symbol: 
it it w it 
it it 
it % it 
it it 
it^it 
Article 2 
Article 1a(1)(a) shall be replaced by the following: 
in the Greek language version of the Directive: 
"To OVVOXIKO eTijoLO irpocy\JaT L KO TTOOOCTO eir ifiâpu vorjç TTOV e^toûvei ce 
eTf)oia. Pâorj TLÇ irapoûoeç a£ïeç rov ovvôXov TÙJV Tpexovoœv f) 
[ieXXovT L KQV VTroxpcûoeuv (ôav e ïuv, e^o4>Xf)oeuiv KÙ L eir tfiotpv voeojv) TTOV 
ixovv avaXri(f)d et otirô TO botveiOTf] non TO (ôave L f ôUe v o) KaTcuvaXuTfj, 
vnoXoyi f e ra i avU^wva \ie TO [iaôr}[iaT L KO TOTTO TTOU uapaTÏ 6 e Ta L OTO 
Trapâprr/Uck; II". ' 
in the English language version of the Directive: 
The annual percentage rate of charge which she!! be that rate, on an annual basis which 
equalises the present value of all commitments (loans, repayments and charges), future 
or existing, agreed by the creditor and the borrower, shall be calculated in accordance 
with the mathematical formula set out in Annex (II).' 
Article 3 
Article 1a(3) shall be deleted. 
Article 4 
Article 1a(5) shall be deleted. 
Article 5 
Article 3 shall be amended as follows: 
Without prejudice to Council Directive 84/450/EEC of 10 September 1984 relating to 
the approximation of the laws, regulations and administrative provisions of the Member 
States concerning misleading advertising, as amended by Council Directive /96 of.... 
1996 concerning comparative advertising, and to the rules and principles applicable 
to unfair advertising, any advertisement, or any offer which is displayed at business 
premises, in which a person offers credit or offers to arrange a credit agreement and 
in which a rate of interest or any figures relating to the cost of the credit are indicated, 
shall also include a statement of the annual percentage rate of charge, accompanied 
5f 
by the symbol as mentioned in Article 1 of this Directive, by means of a representative 
example if no other means is practicable. 
Article 6 
Article 4(2)(a) shall be amended as follows: 
(a) a statement of the annual percentage rate of charge, accompanied by the 
symbol as mentioned in Article 1 of this Directive 
Article 7 
Annex I attached hereto shall become Annex II, replacing Annex II of Directive 87/102 (as 
amended by Directive 90/88). 
Article 8 
Annex II attached hereto shall become Annex III, replacing Annex III of Directive 87/102 (as 
amended by Directive 90/88). 
Article 9 
1. Member States shall bring into force the laws, regulations and administrative provisions 
necessary for them to comply with this Directive no later than 31 December 1996 and 
shall inform the Commission thereof. 
When Member States adopt those measures, they shall include references to this 
Directive or shall accompany them with such references on their official publication. 
The Member States shall lay down the manner in which such references shall be 
made. 
2. The Member States shall communicate to the Commission the texts of the provisions 
of national law which they adopt in the field governed by this Directive. 
Article 10 
This Directive is addressed to the Member States 
Done at Brussels, 1996 
L 
Annex I 
Annex II 
THE BASIC EQUATION EXPRESSING THE EQUIVALENCE OF LOANS ON THE ONE 
HAND AND REPAYMENTS AND CHARGES ON THE OTHER 
K = m A K' = m' A* 
E -^-7 - E * 
Af-1 (1 + /)'* fC =1 (1 + /)'*• 
Meaning of letters and symbols: 
K is the number of a loan 
K' is the number of a repayment or a payment of charges 
AK is the amount of loan number K 
A\- is the amount of repayment number K' 
J2 represents a sum 
m is the number of the last loan 
m ' is the number of the last repayment or payment of charges 
tK is the interval, expressed in years and fractions of a year, between the date of loan 
No. 1 and those of subsequent loans Nos. 2 to m 
tK- is the interval, expressed in years and fractions of a year, between the date of loan 
No. 1 and those of repayments or payments of charges Nos. 1 to m' 
i is the percentage rate that can be calculated (either by algebra, by successive 
approximations, or by a computer programme) where the other terms in the equation 
are known from the contract or otherwise. 
Remarks 
(a) The amounts paid by both parties at different times shall not necessarily be equal and 
shall not necessarily be paid at equal intervals 
(b) The starting date shall be that of the first loan 
(c) Intervals between dates used in the calculations shall be expressed in years or in 
fractions of a year. A year is presumed to have 365 or 366 days 
(d) The result of the calculation shall be expressed with an accuracy of 2 decimal places. 
If the figure at the third decimal place is greater than or equal to 5, the figure at the 
second decimal place shall be increased by one. 
61 
Annex II 
"Annex III: EXAMPLES OF CALCULATION 
First example 
Sum loaned: S = 1000 ECU on January 1 1994 
It is repaid in a single payment of 1200 ECU made on June 30 1995 (547 days after the date 
of the loan) 
The equation becomes: 1000 = 12^ 
647 
or (1+4 365 
547 
(1+4 365 ~ 1.2 
1+i= 1.129444207... 
i = 0.129444207... 
This amount will be rounded to 12.94% 
Second example 
The sum loaned is S = 1000 ECU but the creditor retains 50 ECU for administrative expenses, 
so that the loan is in fact 950 ECU; the repayment of 1200 ECU, as in the first example, is 
again made on June 30 1995. 
The equation becomes: 
547 
365 =1,2 
950 = 1200 
(1+J) 547 
365 
or 
(u& =1200 =1 I2631 57 
I1 +0 950 
1 + i = 1.1688996... 
i = 0.1688996 .. 
rounded to 16.89% 
a 
Third example 
The SLm loaned is 1000 ECU, repayable in two amounts, each of 600 ECU, paid after one 
and two years respectively. 
The equation becomes: 
600 600 600 600 1000=-1+/ (1 +/)730/365 1+/ (1+/)2 
It is solved by algebra and produces i = 0.1306623, rounded to 13.07% 
Fourth example 
The sum loaned is 1000 ECU, on January 1 1994, and the amounts to be paid by the 
borrower are: 
After 3 months (0.25 years ) 272 ECU 
After 6 months (0.5 years ) 272 ECU 
After 12 months (1 year ) 544 ECU 
Total 1088 ECU 
The equation becomes: 
1000=^^+. 272 544 89 180 365 
(1+/)365 (1+/)365 (1+/)365 
This equation allows i to be calculated by successive approximations, which can be 
programmed on a pocket calculator 
The result is: 
i = 0.13226, rounded to 13.23% 
C2. 



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COM(96) 79 final 
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