Personal loans: how to spot shady lenders

To avoid falling prey to unscrupulous lenders, you should consider all loan providers carefully. Source: iStock / Sarinyapinngam

Loans with bad debt or without any form of credit check? This is how unscrupulous “lenders” lure unsuspecting borrowers. These deals are often fraudulent. Find out here how to identify loan scams and protect yourself against them.

Loan deals advertised with statements like “bad credit loans” or “no-credit-check loans” can sound rather appealing. However, the companies behind such claims are usually untrustworthy debt consolidation companies, not Swiss lenders. Our five useful tips will help you to spot loan scams and show you the right way to go about choosing a lender.

Trap 1: Loans without credit check

The Consumer Credit Act stipulates that all lenders must report all issued loans to the Information Centre for Consumer Credit (IKO). Providers of peer-to-peer loans (often abbreviated to P2P loans) have also been subject to the Consumer Credit Act since April 2019. In addition, reputable lenders are members of the Central Office for Credit Information (ZEK). This organization keeps records of all the loans issued by its members and provides information in response to member requests regarding loan applications. This means that it is impossible to obtain a loan without a ZEK disclosure or credit check in Switzerland.

If a lender fails to comply with the applicable regulations, it can face legal action. So be careful if someone tries to offer you a loan that requires no credit check or ZEK disclosure. It could be a scam.

Here’s what to do to:

  • Do your research on the bank or lender. All reputable lenders are members of the ZEK.
  • Be aware that dishonest debt consolidation companies advertise loans but charge fees for questionable services instead.
  • Consult the list of public warnings regarding fraudulent lenders provided by the Swiss Financial Market Supervisory Authority, Finma. You can also search for customer feedback in online forums, for example.
  • Visit Zefix, the business index, to find out which company is behind a particular website. Even if “.ch” appears in the URL, the organization may be a letterbox company.

Trap 2: Loans with bad credit

You will often see adverts for “bad credit” or “bad debt” loans. These ads target customers experiencing serious financial difficulties. Reputable lenders do not use such slogans in their advertising. They examine the credit capacity of their applicants carefully in order to protect them from falling into excessive debt.

Whether or not you still have an active debt collection order filed against you, the lender will review your application rigorously. A debt collection order is often a reason for a loan to be rejected. In all cases, it will have a negative effect on your credit standing and will affect your chances of being approved for a loan and/or the conditions offered.

Here’s what to do to:

  • Work out a budget to create an overview of your finances. Templates are available from the Swiss budget counselling service Budgetberatung Schweiz (in German, French and Italian only) as well as from various banks and insurance companies.
  • Should you find yourself in serious financial difficulties, don't hesitate to contact a debt counselling service. Possible organizations include Verein Schuldenberatung (website in German and French only), Caritas Switzerland debt counselling service and the debt counselling service provided by your canton of residence.
  • Research the bank or lender before submitting a loan application. To do this, read the tips under “Loans without credit check”.

Trap 3: Additional charges

According to the Consumer Credit Act, all lender fees must be included in the effective annual interest rate in order to protect consumers. Nevertheless, lenders are permitted to charge fees for services that are not directly connected to the loan costs, such as payment reminders, address searches and early contract termination.

Here’s what to do to:

  • Check the contract offered by the lender carefully before signing. Inclusion of terms such as “broker's commission” or similar indicates that this is not a legitimate lender, as personal loan brokers are not allowed to charge customers any fees.

Trap 4: Instant loans

Terms such as “express loans” and “instant loans” promise fast access to money. However, these deals are offered almost exclusively by fraudulent lenders. According to the loan industry's self-regulatory code of practice, lenders are explicitly prohibited from using the term “instant loan” in their advertising. In addition, the Consumer Credit Act stipulates a 14-day cooling-off period before a consumer loan may be paid out.

Exceptions to this cooling-off period exist for loans that do not fall under the definition of a consumer loan. In most cases, this refers to loans of over 80,000 francs.

Here’s what to do to:

  • Check how the lender advertises its products. If they use phrases such as “instant loans” or “get approved in minutes” or similar, proceed with caution. Check the legitimacy of the lender using other sources.

Trap 5: Dishonest debt consolidation companies

Many loan applicants end up using a debt consolidation company without realizing it. These companies are usually advisors and not lenders. Of course, there are legitimate as well as fraudulent debt consolidation companies.

Applicants to these organizations, also known as debt relief companies, usually receive a contract to consolidate their debt. With this arrangement, you don't get a loan, but must pay the company for the services provided.

Here’s what to do to:

  • Check whether the company features on the list of public warnings compiled by the Swiss Financial Market Supervisory Authority (Finma).
  • Check the lender’s website for indications that it is a debt consolidation company and not a loan provider.
  • Check and compare reputable lenders on the Comparis website.

In short: check, research and compare

Only consider lenders that are members of the Central Office for Credit Information (ZEK). Compare trustworthy lenders, loans, interest rates and conditions at Beware of low-interest deals.

Note: if your loan application is rejected, the details will be recorded at the ZEK. This may reduce your chances of being approved for a loan in the future.

Are you looking for a personal loan? The team at Credaris, a partner service of Comparis, can help you find a loan offering the best rates and conditions for your needs. Send a quick, no-obligation loan enquiry and benefit from the expertise of the Credaris specialists.