The Court of Justice of the European Union has issued a ruling clarifying a key point in consumer credit: banks can only apply interest on the principal amount lent, not on expenses such as opening or processing fees. The decision, which responds to a query from a Spanish court, requires recalculating debts and opens the door to mass claims by customers.
Development: how it affects the calculation of amortization systems 🧮
This ruling directly impacts the algorithms of banking software that manage loans. Until now, many systems added fees to the principal to calculate interest using methods such as the French or German systems. With the new criterion, developers must separate the principal amount lent from associated costs, adjusting amortization tables. This implies reviewing APR formulas and settlement modules to prevent interest from being calculated on artificially inflated figures.
Banks, back to the drawing board with the discount calculator 🏦
Now banks will have to dust off their old office calculators to recalculate thousands of loans. It seems the banking sector thought interest was like mayonnaise: it sticks to anything. But the CJEU has said no, that interest only applies to the principal, not to the fees they themselves invented to round up their bonuses. Good thing there are still courts that know how to add without taking a commission.