One of the most recent consumer law directives adopted by the European Commission was the Consumer Credit Directive (2008/48/EC). Yesterday, the European Commission published Guidelines as to the application of this Directive in relation to costs and the Annual Percentage Rate of charge (APR). This Directive was established in order to assure that consumers all over Europe had access to the same standard information on the basis of which they could make a decision whether and on what conditions to take a credit.
As we all know, financial literacy is a problem among consumers and often the credit agreements are written in a language that makes understanding of the contract terms almost impossible. If a consumer misunderstands the credit information, he may take out a more expensive credit than necessary, may miscalculate the credit cost and increase the risk of insolvency and indebtedness. The Directive is supposed to counteract that, but in order to be effective it needs to properly and uniformly understood and interpreted. In order to facilitate this, the European Commission issued these Guidelines.
The Guidelines point out to creditors and consumers how to calculate the total cost of credit and the APR charge, as well as explains certain assumptions that have been made in the Directive. When the APR is properly estimated, the consumers can easily compare offers and know exactly how much the credit, including all its elements (e.g. charges on top of borrowing rate), will cost them.
