What is a loan? Everything you need to know

What are the rules for personal loans in Switzerland? Who can issue loans? What organizations are involved? Comparis sheds light on the matter.

Overview:

• What are the different types of loans?
• Definition of a loan
• Who can issue personal loans in Switzerland
• How the loan process works

What are the different types of loans?

The two most relevant factors for categorizing loans are:

• Whether the borrower is a company or a private individual
• Whether the loan is secured or unsecured

Business loans can be broken down into short-term operating loans and long-term investment loans.

The following are examples of loans for private individuals:

• Mortgages (secured by the underlying real estate asset)
• Lombard loans: involves lending out easily liquefiable assets such as securities (secured loan)
• Loans between private individuals
• Overdraft credit (for bank accounts)
• Credit cards and store cards
• Peer-to-peer loans
• Personal loans

Personal loans can be distinguished as follows:

• Consumer credit: personal loans regulated by the Consumer Credit Act
• Small or payday loans: colloquial terms without a precise definition
• Student loans: Splendit student loans (not regulated by the Consumer Credit Act)
• For continuing education: Cashgate Career
• Loans for renovating property

You may encounter the following marketing terms in the context of loans:

• Online loans, for which (most of) the loan application process is completed online. These are normal personal loans/consumer loans.
• Instant loans – usually a misleading advertising term. Instant loans are not available in Switzerland as lenders are required by law to run thorough checks on potential borrowers.

Personal loans: definition and basics

There will be different legal and formal requirements depending on the type of loan in question. Loan agreements between private individuals are valid even without a contract and are regulated by the Swiss Debt Collection and Bankruptcy Act (SchKG).

Consumer loans on the other hand, are subject to extensive legal and organizational requirements defined by various agencies:

• Swiss Federal Act on Consumer Credit (Consumer Credit Act)
• Based on Article 36a of the Consumer Credit Act, members of the Swiss Consumer Finance Association have agreed to self-regulate and have signed an agreement prohibiting aggressive advertisement.
• The Ordinance to the Consumer Credit Act stipulates that the Swiss Federal Department of Justice and Police (FDJP) shall set the maximum interest rate for consumer loans.
• Loan granting practices are also governed by the Unfair Competition Act (in German, French and Italian only).
• As financial intermediaries, lenders are also subject to the provisions of the Anti-Money Laundering Act (AMLA).
• The Information Centre for Consumer Credit (IKO), a federal body based on the Consumer Credit Act
• Central Office for Credit Information (ZEK), which collects and provides information on the credit histories of private individuals and legal entities

When does it make sense to take out a loan?

People often take out loans due to changes in their life circumstances. What does this mean? It could mean making a necessary purchase like a car or fulfilling a long-held dream without clearing out your savings account.

Loans are basically appropriate for situations such as the following:

• Getting through temporary financial difficulties
• When you need additional funds quickly and don't have time to save
• Making long-term purchases such as furniture or a car
• Investing in your future, such as by taking a continuing education course
• If you have stable income but need to preserve your savings

Loans should be avoided in these cases:

• For ongoing financial difficulties that a loan would only postpone
• For non-durable goods or leisure activities and holidays
• For non-essential products that far exceed your means

Who can issue loans in Switzerland?

Swiss law distinguishes between commercial lending and non-commercial lending.

Financial institutions, credit institutions, banks: in Switzerland, banks are the most common commercial lenders issuing loans to private individuals, whether it's a full service bank, a separate business unit of a bank, a specialized lending bank or a dedicated credit institution.

Crowdlending institutions: with respect to personal, business and real estate loans, the total loan volume issued by crowdlenders has been growing sharply year by year. Crowdlending platforms act as brokers between lenders and borrowers. In this case, lenders are either private individuals or institutional investors (companies). Although crowdlending platforms do not issue loans themselves, they are still subject to the provisions of the Consumer Credit Act when handling personal loans.

Credit brokers: credit brokers are private individuals or legal entities that provide commercial brokerage services for personal loans. This means that they do not award loans themselves, but rather advise clients on their options and manage the lending process between the bank and the borrower. Credaris, a partner service of Comparis, is one example of a credit broker. Here you can find out more about the process and the benefits of using such a service.

Your next steps:

Important criteria for consumer loans

How interest rates and loan costs are determined

Lenders carry out thorough credit checks to determine whether to extend credit and at what interest rate.

All the costs directly associated with the loan must be included in the effective annual interest rate. This means that there can be no additional costs beyond the monthly instalment agreed in the contract. This excludes extra, purely administrative expenses such as payment reminders and additional account statements. Costs associated with optional loan insurance are also usually listed separately.

Minimum and maximum loan amounts in Switzerland

In Switzerland, loans range from 1,000 to 250,000 francs – very occasionally more. Possible loan amounts vary from one lender to another. Loan amounts between 500 and 80,000 francs are considered to be consumer loans and are subject to the relevant provisions of the Consumer Credit Act.

Repayment terms

In Switzerland, repayment terms range from 6 to 120 months, with the maximum periods varying according to the lender. Loans with repayment terms of less than three months are not regulated by the Consumer Credit Act.

Credit check

All applicants will be checked thoroughly before being awarded a loan. This credit capacity check is mandated by law for consumer loans. Find out more about eligibility criteria and credit checks.

Right of withdrawal for consumer loans

The Consumer Credit Act aims to protect borrowers. Part of this protection is the 14-day cooling-off period in which they may withdraw from their personal loan agreement. This is why consumer loans are only paid out two weeks after the contract is signed, once the cooling-off period is over. Non-consumer loans can be paid out without this waiting period.

Considering taking out a loan?

Lending in Switzerland is governed by strict consumer protection regulations. Lenders have to adhere to strict guidelines when extending credit, and apply extensive eligibility and risk criteria of their own when evaluating loan applications. To guard against fraud, these criteria are not made known to the public. This means that it is not always possible to gauge your chances of being approved for a loan by a specific lender. Approximately 50% of all loan applications are rejected.

Credaris, a partner service of Comparis, will help you compare loan options and show you which lender is most likely to grant you a loan and at what conditions. By submitting a free, non-binding loan enquiry to Credaris, you can boost your chances of being approved for a loan by over 50% compared to applying directly to a lender.