Revolving credit after the Cogilaw Company reform and the Mahon law

A “reserve of money” permanently available and usable as you see fit, with low reimbursements and adapted to your means! The discourse of banks, credit organizations and supermarkets has been particularly well developed over the years, but what exactly should we think of revolving credit?

Attractive because of its flexibility and ease of use, this type of credit can provide welcome relief in the event of temporary cash flow difficulties. But used more regularly, in the longer term or for large amounts, the famous reserve of money can also accelerate the spiral of over-indebtedness in a home. These are all reasons that require you to master a few basic concepts.

Principle of operation

Principle of operation

Revolving credit is also known in common parlance as “revolving credit”, “permanent” or even “replenishable”. Since 1 September 2010, however, only the term “renewable” is allowed in contracts and brochures, so as not to induce the customer into error.

By contract, the bank, the credit institution or the supermarket makes available to the beneficiary a reserve of money of a certain amount (1,000, 2,000, 5,000 $…) and available at any time. This reserve can be borrowed in whole or in part, either by a transfer to the beneficiary’s current account, or by a purchase made with a credit card linked to the money reserve. The use of this money is left to the complete discretion of the borrower, which therefore distinguishes revolving credit from a classic “allocated ” credit, such as a car loan for example.

Loan duration and cost: a complex mechanism

Loan duration and cost: a complex mechanism

As soon as all or part of the money reserve is borrowed, the borrower begins to pay monthly installments, which must include a share of the principal repayment. In any event, and whatever the interest rate charged, the full repayment of the loan must not take more than three years (36 months) for an amount less than $ 3,000, and not more than five years (60 months) for a higher amount. Finally, a deadline cannot be less than $ 15.

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The cost of a revolving credit, that is its overall effective rate (TEG), is typically very high, often close to the rates of wear and tear, and more important than that of a conventional consumer credit and depreciable. The total cost of a revolving credit is all the more difficult to calculate that the interest rate is, most often, revisable monthly, and that the capital borrowed can change regularly with the liking of new loans or prepayments. Repayments, even partial, are strongly encouraged as soon as you can afford them, as they do not give rise to any penalty and will prevent you from paying interest unnecessarily.

The lender is required to notify the borrower, every month and by post, of the general condition of his credit (interest rate applied for the month, TEG since the start of the credit, schedule, principal remaining due…).

Loyalty cards and promotional actions

Loyalty cards and promotional actions

Many loyalty cards from major brands now offer an optional revolving credit, and allow instant use of the cash reserve at the checkout. In this case, the mention “credit card” must appear in full on the back of the card. Furthermore, and in order to avoid an excessive mixing of genres, the advantages linked to the use of the loyalty card cannot be conditioned on the use of the money reserve, and the distinction between the two functionalities must be clearly stated in the presentation brochures.

Revolving credit should not be confused with promotional operations such as ” payment in x times without fees “, which allow you to benefit from 0% credit conditions: the amount due will not be subject to the contractual interest rate of your money reserve only if you miss a deadline.

Renewal of revolving credit

Renewal of revolving credit

Each year, the renewal of the revolving credit must be submitted to the borrower at least three months in advance by the lender, who is also supposed to consult beforehand the national file of incidents of repayment of loans to individuals (FICP). Up to twenty days before the renewal date, the borrower can then express his opposition by returning the delivery slip. In this case, he will of course have to repay the last sums he owes, but he will no longer be able to use the money reserve again.

In addition, and if the money reserve has not been used once during the past twelve months, the lender must propose in his mail the suspension of the contract. In the event of a positive response or no response from the borrower, the revolving credit is then suspended. In the absence of reactivation, the termination is final one year later.

Despite an increasingly strict legal framework…Despite an increasingly strict legal framework…

In view of the dangers represented by revolving credit for the most vulnerable, several laws and regulatory texts, including the Cogilaw company of 2010 and the Mahon Law of 2014, significantly strengthened the supervision of these contracts.

In order to encourage the subscription of a traditional depreciable credit rather than that of a revolving credit, the law obliges the lender to automatically propose this solution for any credit greater than $ 1,000. The Mahon Law provides for a new threshold, not yet defined but undoubtedly lower, beyond which this proposal for depreciable credit will have to be materialized in a very precise manner, with in particular a comparative presentation of the “cost”, of the “depreciation terms “And the” repayment period “for each of the two credits.

In addition, the participation of a seller in the subscription of a revolving credit by the customer (via a premium, a higher commission, etc.) is now a formally prohibited practice.

Finally, remember that a revolving credit offers the same degree of legal protection than a standard consumer credit, with in particular and since 1 May 2011 a statutory withdrawal period of fourteen days after signing the contract.

Revolving credit can always represent a risk

Revolving credit can always represent a risk

Despite the efforts made by the Legislator in favor of information and consumer protection, a survey carried out by the Best Bank in March 2014 reveals that revolving loans continue to be involved in almost 75% of over-indebtedness files. On average, it was even found that an over-indebted household held four of these credits, for a total amount equal to approximately 30% of its total debt.

Please note that…

Revolving credit can represent an interest for people with irregular cash inflows: in the short term, in fact, the costs induced by this credit may prove to be much less heavy than a bank overdraft, which makes this product ideal to settle temporary cash concerns.

Conversely, the fact of using a reserve of money to live sustainably beyond its means inevitably leads to serious problems.