Which credit cost practices are invalid under EU law?
A new directive—Directive (EU) 2023/2025—will reshape the consumer credit landscape across the European Union. Adopted on October 18, 2023, the directive mandates that all member states align their national legislation with its provisions within two years. The regulation must be fully implemented within three years.
The directive’s main goal is clear: to ensure that lenders act in the best interest of borrowers. It introduces a higher level of consumer protection, banning misleading or high-risk practices and setting stricter rules for transparency. This is a modernized version of the previous 2008 credit directive, taking into account changes in the digital and financial environment. It adapts credit markets to today's technological and economic realities.
What Is Meant by the “Cost of Credit”?
The cost of a consumer loan is the total compensation the borrower pays to the lender for using the borrowed funds. This cost includes:
- The annual interest rate (APR) — fixed or variable
- Additional fees or services such as insurance
- Any other charges associated with the credit
These costs are regulated under national consumer credit laws. In Bulgaria, for example, a maximum Annual Percentage Rate (APR) is set at five times the statutory interest rate. The statutory rate is calculated by adding 10% to the default interest rate set by the Bulgarian National Bank.
If a credit agreement results in total costs to the consumer exceeding the maximum APR, the contract may be declared invalid, and the borrower may only be required to repay the original principal amount—without the excessive charges.
What Makes a Credit Cost “Illegal”?
The term “total cost of credit” includes all known fees and commissions payable by the borrower to the lender. Any cost not included in the APR calculation—yet charged to the borrower—can be grounds for nullifying the contract.
These include:
- Insurance costs not included in the APR
- Commitment fees for fixed interest rates or similar, deducted upfront from the loan but not disbursed as cash
- Extra charges for visits, letters, or other lender-side operational costs
- Administrative or handling fees related to loan disbursement or servicing
- Penalty fees due to lack of a guarantor or co-signer
- Any incorrect or misleading APR that hides real costs
- Clauses designed to bypass legal credit cost limitations
Such practices have already been ruled unfair and invalid by both national courts and the Court of Justice of the European Union (CJEU). In these cases, consumers are typically only obligated to repay the principal amount received, without the excessive or hidden charges.
Common Invalid Charges in Credit Agreements
Examples of credit practices considered unlawful under the new directive and existing case law:
- Charging for insurance without disclosing its cost in the APR
- Upfront fees deducted from the loan that are not actually received by the borrower
- Unlisted service charges for communication, administration, or credit handling
- Applying penalty clauses for not providing a guarantor or collateral
- Understated or manipulated APRs that exclude known costs
- Any contract term that aims to circumvent the law to increase lender profit
Key Takeaway
Any clause in a consumer credit contract that violates transparency rules or unfairly increases the cost to the borrower is void. The EU directive aims to ensure consumers are not misled or overcharged—and to restore fairness in the lending relationship.