TEG (Global Effective Rate): Definition, Calculation and Use
The TEG (global effective rate) is a key indicator for measuring the total cost of a loan or credit. It takes into account all the costs associated with the loan, such as interest, commissions, commissions, insurance and administrative fees, and allows credit offers to be effectively compared with each other. In this article, we will explore the key elements of the TEG, how it is calculated, how to use it, and the pitfalls to avoid in order to fully understand this financial indicator.
1- Objectives of the overall effective rate
The TEG was put in place to protect borrowers from abusive practices by lenders, which often included hidden or misstated fees in credit offers. By setting an overall interest rate that takes into account all credit costs, the TEG allows borrowers to choose the most advantageous offer for them, in complete transparency.
2- How to calculate the overall effective rate?
The calculation of the TEG is complex and requires taking into account numerous parameters. There are several methods for calculating it, but the most commonly used method is the cash flow discounting method, which involves taking into account all credit-related financial flows over the total term of the loan.
To calculate the overall effective rate, follow these steps:
Gather all the information you need
The loan amount, the term of the loan, the nominal rate, the application fees, the commissions, the insurance and all other costs related to the credit.
Calculate financial flows
Calculate all credit financial flows over the total term of the loan, including repayments, interest, fees, and insurance.
Update financial flows
Update all financial flows using a discount rate, which reflects the cost of money in the market.
Determine the TEG
Determine the TEG by solving the equation that equals the discounted sum of financial flows and the loan amount.
3- Use of the global effective rate
The TEG is a valuable tool for comparing credit offers and evaluating their total cost. It allows you to choose the best offer according to your needs and your financial situation. To use TEG effectively, you should:
Comparing TEGs objectively
Do not be seduced by an attractive interest rate, which may hide hidden or poorly indicated fees.
Understand contract details
Carefully review all terms and conditions of the credit agreement, especially the clauses on fees and penalties for late payments or early repayments.
Take into account your financial situation
Evaluate your repayment capacity and choose the credit offer that best fits your needs and financial situation.
Bringing the competition into play
Request credit offers from several financial institutions and compare TEGs to find the best deal.
4- The pitfalls to avoid with TEG
The TEG can sometimes be misleading, especially in the following cases:
Zero-interest credit offers
Zero-rate credit offers often come with hidden fees, which are included in the overall effective rate and can make credit more expensive than credit with a higher nominal rate.
Revolving credits
Revolving loans are associated with high fees, which are included in the TEG and can make the loan more expensive than a fixed rate loan.
Promotional rates
Promotional rates have restrictive conditions that can make credit more expensive if these conditions are not met.
Conclusion
The overall effective rate is a key indicator for evaluating the total cost of a credit or loan, taking into account all borrowing costs. It allows you to compare credit offers objectively and to choose the best offer according to your needs and financial situation. To use the TEG effectively, it is necessary to understand how it is calculated, to compare offers objectively, to take into account your financial situation and to be wary of possible pitfalls.
