Refinancing a personal loan: the 2 advantages

Save money by refinancing your loan. Source: Thinkstock

Who does not want to pay less interest or smaller monthly instalments on their loan? In Switzerland, changing one's lender is easy and uncomplicated. explains how to refinance a personal loan – and thereby reduce the strain on your wallet.

In Switzerland, borrowers may terminate their existing consumer credit contract any time. The banks may not charge anything for this. This basic principle is stipulated by the Consumer Credit Act (KKG). The idea behind this concept is that anybody should be allowed to pay off their debts or accept a more favourable offer from another bank at any time if they are able and willing to do so.

This means that you may terminate your loan any time if you win the lottery, for example, or come into an unexpected inheritance. This right to terminate also holds a certain advantage for borrowers who still need their loan.

Customers may refinance a "consumer credit" as it is called in banking jargon. In other words: this makes it easy for borrowers to change their creditor any time. The banks negotiate among themselves and the new bank will transfer the due amount to the old bank.

This allows customers to benefit from the following advantages:

  • Lower interest rates
  • Smaller monthly instalments

Reduce interest

A frequent reason for refinancing one's loan is that the borrower wishes to pay less interest. In fact, clients who pay a lot of interest with one bank can often get better terms with other banks. Especially if they have a good payment record. This allows them to save thousands of francs.

Example: a customer can save up to 4,198 francs on interest for a loan of 20,000 francs over a term of 48 months (difference between highest and lowest rate).

Smaller instalments

Another motive for refinancing one's loan is that the borrower might want to pay a smaller monthly instalment. Loans with a short term of contract come with high monthly instalments. If the borrower refinances this open loan with a new loan with a longer term of contract, the instalments that have to be paid each month become considerably smaller.

But watch out: the longer you borrow money, the higher the final interest costs will be. The main advantage of a longer duration is that the customer can always pay off more, but does not have to. Unscheduled repayment is always allowed with any bank.

Extend line of credit

Most borrowers refinance their loan in the context of a loan increase. In any case, it is well worth checking whether you would receive a better offer for your existing loan on a regular basis.