comparis.ch has put together this useful guide to help you navigate the world of personal loan terminology.
Central Office for Credit Information
The Central Office for Credit Information (ZEK) is the Swiss information centre for matters relating to loans, leases and credit cards. The ZEK collects information on the credit standing of applicants and recipients of personal loans and stores it in its database for a set period of time. This information can be accessed by all commercial lenders in Switzerland.
Consumer Credit Act
The Swiss act governing consumer credit (the Consumer Credit Act (KKG)) provides the legal framework for personal loan agreements in Switzerland. Created to protect borrowers from becoming too heavily indebted, the act defines the content and form of contracts, the rights and obligations of the parties and the maximum permissible interest rate, among other things.
Credit capacity refers to the ability of the borrower or loan applicant to pay back a loan, including interest, on time. It is determined on the basis of the borrower's personal income and expenditure. When assessing credit capacity, Swiss lenders base their calculations on a repayment term of 36 months, even when the agreed term is longer.
A credit check is carried out by the lender on a borrower or loan applicant to determine their credit standing. This credit check results in a credit score or rating, which the lender uses to set the rates and conditions for the loan (the higher the score, the cheaper the rates for the borrower).
A person’s credit standing provides an indication of how likely they are to pay back their loan on time. It is determined by two elements: credit capacity and creditworthiness. The credit standing of a borrower is determined by means of a credit check.
Creditworthiness refers to the expected payment habits or practices of the borrower or applicant, in other words, their willingness to pay back a loan, including interest, on time. When assessing creditworthiness, lenders consider a range of risk factors, such as age, nationality, residence status, frequency of moving place of residence or work and payment history.
Crowdlending is a new way to borrow money. It involves multiple private individuals lending money to another private individual or company for a particular project. This takes place on dedicated Internet platforms called online lending marketplaces.
Article 17 of the Consumer Credit Act gives borrowers the right to pay off their personal loan before the end of the agreed term. No interest is charged on the unused borrowing period. In addition, the borrower is entitled to a corresponding reduction in other loan costs.
Effective interest rate
The effective interest rate, also called the effective annual interest rate, is the total annual cost of taking out a loan (the nominal interest rate plus all other costs arising in connection with the loan, such as administration and arrangement fees).
Interest is the amount borrowers must pay lenders for borrowing money. In the field of personal loans, a distinction is made between nominal interest and effective interest.
The loan term is the period of time within which a loan must be paid off in full. For personal loans, this term is usually between 12 and 60 months. The length of the term affects how high the monthly instalments are and the total cost of the loan.
Maximum interest rate
The maximum interest rate is the highest permissible interest rate that can be applied to personal loans in Switzerland. It is defined by the Federal Council in the Ordinance to the Consumer Credit Act (VKKG) and refers to the effective interest rate. It is currently 10 per cent.
The monthly instalment is the amount of money a borrower is required to pay to the lender each month. It comprises the nominal interest rate and a repayment amount.
Nominal interest rate
The nominal interest rate, also known as the nominal annual interest rate, is the annual interest rate payable on a loan. Unlike the effective interest rate, it only includes the interest payments to be made – it does not include any other costs arising in connection with the loan, such as administration and arrangement fees.
The outstanding balance or debt is the amount of money that the borrower would have to pay the lender if the loan agreement was cancelled today. The outstanding balance comprises the loan amount that has not yet been paid off plus any accrued interest and fees not yet paid.
A personal loan, also known a consumer loan, is an interest-bearing loan provided by a commercial lender and has the following characteristics:
- Loan amount of between 500 and 80,000 francs
- Loan term of more than three months
- Not directly or indirectly secured by a mortgage or protected by sufficient assets or collateral
- Used exclusively for private purposes
Personal loans are subject to the Swiss Consumer Credit Act.
Refinancing a loan means paying off the remaining debt of an existing personal loan with money from a new loan. Borrowers usually do this to benefit from better interest rates offered by different lenders. In Switzerland, the process is regulated by the Consumer Credit Act (KKG), which states that existing personal loans can be paid off early at any time.
Repaying a loan means paying back the loan amount provided to the borrower by the lender. The loan is usually repaid in monthly instalments.
Topping up simply means increasing the amount of your existing loan. Since topping up a loan means taking out a new loan agreement, you usually need to complete another credit check.