The Court of Justice of the European Union on Thursday issued a significant ruling for consumer rights in the European credit market, finding that banks may not charge interest on amounts that are not actually paid to the borrower but are instead used to cover costs linked to the credit. The court clarified, however, that such costs may be passed on to consumers through a higher interest rate, provided transparency requirements are met.
The case originated in Poland, where a consumer entered into a consumer credit agreement with a bank. Part of the loan was used to pay for credit insurance described as “optional." The interest rate, however, was applied not only to the amount actually received by the consumer but also to the insurance premiums, increasing the overall cost of the loan.
The borrower took the matter to court, arguing that he did not owe interest or charges on the entire amount of the credit, since the bank had calculated interest on sums that did not constitute actual financing provided to him. The national court referred questions to the EU court, which ruled that the practice was incompatible with the EU directive on consumer credit.
The court stressed that the directive draws a strict distinction between two key concepts. The first is the “total amount of credit,” meaning the funds made available to the consumer. The second is the “total cost of the credit,” which includes all expenses, such as interest, insurance premiums and commissions. These concepts are mutually exclusive. As a result, the total amount of credit cannot include sums intended to cover costs such as insurance or other charges that are not paid directly to the consumer.
The court also clarified that the borrowing rate may be applied only to the actual amount of credit received by the consumer. It therefore ruled out the charging of interest on amounts used by the bank to cover costs linked to the loan.
At the same time, the court acknowledged that such costs may still be passed on to consumers through other means, including a higher interest rate, provided that transparency rules are respected.
The ruling is linked to the dual objective of Directive 2008/48/EC on consumer credit agreements, namely ensuring the proper functioning of the internal consumer credit market and strengthening transparency so that consumers can more easily compare offers, in particular through the annual percentage rate of charge.
The decision is expected to affect banking practices across the European Union, reinforcing borrower protection and setting clearer limits on how interest may be calculated in consumer credit agreements.
Source: CNA