1. What is a consumer loan?
A consumer loan is a loan that fulfils the following criteria as defined by the Consumer Credit Act:
The loan is used by a private individual (consumer) for private purposes only (not professional or commercial purposes)
The loan amount is between 500 and 80,000 francs
The repayment term is longer than 3 months
The loan is not secured by collateral (e.g. directly or indirectly by a mortgage or by ordinary bank warranties such as assets)
The umbrella term for consumer loan is personal loan.
2. Personal or consumer loan: 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) (link not available in English).
Consumer loans, on the other hand, are subject to extensive legal and organizational requirements defined by various agencies:
The Swiss Federal Act on Consumer Credit (Consumer Credit Act [KKG]).
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. It currently stands at 11% 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) is a federal body based on the Consumer Credit Act
The Central Office for Credit Information (ZEK) collects and provides information on the credit histories of private individuals and legal entities.
3. Main features of a personal loan
A personal loan is an interest-bearing loan not secured by collateral. Personal loan amounts typically approved on the market range from 500 to 250,000 francs. In certain circumstances, some lenders will also offer loans of over 250,000 francs. Higher amounts are available on crowdlending platforms.
Personal loans of 500 to 80,000 francs with repayment terms of three months or more are considered consumer loans and are subject to the provisions of the Consumer Credit Act (KKG). Personal loans of over 80,000 francs are not subject to the KKG’s provisions that protect borrowers from getting into excessive debt, which means there is no compulsory credit capacity check or legal cooling-off period prior to disbursement.
Personal loans that do not fit the definition of the KKG or are between two private individuals are subject to the provisions of the debt enforcement and bankruptcy act (SchKG) (only available in German).
Loan amount: this is the amount of money taken out by the borrower.
Effective annual interest rate: the effective annual interest rate must be stated in the consumer credit agreement. It expresses the loan costs for the personal loan in terms of an annual percentage, which must include all the loan costs. If this is not possible, these costs must be listed separately.
Repayment term: the agreed period within which a loan must be repaid. In Switzerland, repayment terms range from 6 to 120 months depending on the lender. The longer the term, the more expensive the loan is. Good to know: in Switzerland, borrowers always have the right to pay more than the agreed minimum instalment or to repay the loan in full before the end of the repayment term. This reduces the cost of the loan for the borrower.
Repayment/amortization: the cost of a loan is based on the term, interest rate and loan amount. Together with the loan amount, this results in the total cost. These costs are divided into monthly instalments that are paid back over the agreed repayment term. Each monthly instalment consists of interest costs and amortization. The interest portion of your monthly instalments will be highest at the beginning of the repayment term.
4. Important criteria for consumer loans
All applicants will be checked thoroughly before being granted a loan. This credit capacity check is mandated by law for consumer loans. Find out more about the requirements and credit checks.
In Switzerland, loans usually range from 1,000 to 250,000 francs, and only 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.
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.
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.
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.
5. 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.
Brokers such as Credaris will help you compare loan options and show you which lender is most likely to grant you a loan and under what conditions.
This article was first published on 10.01.2017