It must be remembered that most banking contracts include a penalty in the event of early repayment. For mortgage loans (for individuals), this penalty cannot exceed 3 months of interest on the amount prepaid (Art. 12 of the Law of August 4, 1992). For businesses, on the other hand, the penalty is often expressed as a "funding loss"—that is, the loss of earnings for the bank, which is deprived of interest until maturity. When the interest rate differential is high, the penalty amount sometimes climbs to as much as 20% or 30% of the nominal amount. It is usually the bank that informs its client of the penalty amount owed, based on a rather complex calculation that is not always fully understood.
This situation is often resented by the client, who feels that their best interests are not being acted upon. Sometimes, they also feel they were not well informed from the start, as they could have chosen another form of credit where the funding loss does not apply (such as a variable-rate loan, for example).
The law of December 21, 2013—also known as the Laruelle Law, named after the former minister who sponsored it—brings about certain changes. This law is aimed at small and medium-sized enterprises. Two simple yet concrete measures were adopted under it:
Rigorous standards and right to information. The bank must provide accurate, clear, and non-misleading information at the time the credit is granted. It must inform the client about the different forms of credit and propose the type of credit best suited to their needs. In the event of a loan refusal, the essential factors on which the refusal is based must be communicated to the client. This provision does not, however, establish a "right to credit" for the business.
Early repayment. For loans with an initial amount not exceeding €1 million, the reinvestment indemnity (funding loss) cannot exceed 6 months of interest, calculated on the amount repaid and at the rate fixed in the contract. For loans exceeding this amount, the reinvestment indemnity is contractually agreed upon between the parties. No reinvestment indemnity will be due if the early repayment occurs in execution of a credit protection insurance policy (outstanding balance insurance), if it involves a loan consolidation with the same lender, or during a non-substantial modification of the credit agreement.
It should be noted that this law only applies to loans concluded after its entry into force (January 10, 2014). Older loans therefore remain subject to their contractual clauses—even though these are precisely the ones where the penalty is the most significant, given the substantial drop in interest rates in recent years.
Even if, from this perspective, the law somewhat misses its mark, it must be acknowledged that the measures taken are appreciable in the current context.
Indeed, the financial crisis reminds us that the granting of credit is one of the main engines of the economy. The weapon of lowering interest rates has already been used by the ECB to such an extent that today the deposit facility rate is negative.
This situation is not sustainable in the long term. For how can one imagine that banks depositing our funds overnight with the ECB can cover their fixed costs with negative margins?
Despite this unprecedented drop in rates, it must be noted that confidence has not been restored. Indeed, it is a matter of confidence—the word credit (credere = to believe) meaning precisely this indispensable faith in the future and in coming success.
Far from grand macroeconomic considerations, it seems that small concrete initiatives, such as the Laruelle Law, can contribute to this goal. Because confidence cannot be decreed; it is built through small steps. And any measure that stimulates entrepreneurship, risk-taking, and investment is welcome.
Illustration: Clou
