Personal loans are a popular source of credit – one in three Swiss have taken one out at some point. They are typically used for unplanned purchases or when money is tight. But these loans shouldn't be rushed into, as mistakes – and it's always the same ones – all-too-often lead to unpleasant surprises.
According to a survey carried out by comparis.ch, two thirds of Swiss feel that personal loans can be a real help. However, taking out a loan in a hurry can cause problems, usually of a financial nature. How can you avoid this? Check out these five tips.
- Don’t be dazzled by low headline rates
Often, the low rates some providers use in their advertisements are little more than sales gimmicks. Most advertise rates that only very few customers actually get. At the moment, lenders are quoting rates as low as 4.5 per cent, but most customers end up paying somewhere between 7.9 and 9.9 per cent. Only borrowers with the highest credit rating enjoy the best interest rates. The riskier a loan is for a bank, the higher the interest rate will be.
- Take time with your application
Because the cost of a personal loan can be relatively high, it makes sense to compare lenders. The potential savings can be considerable. It is particularly important to accurately assess your own credit rating and ability to repay before you apply for a loan, because all loan applications are recorded by the Central Office for Credit Information (ZEK). Loan rejections after a credit check are saved for two years and can be seen by any bank. If you have been rejected once, it is much harder to bag a low interest rate or even secure a loan at all. So don't rush into applying without doing some research first, as this will reduce your chances of getting a (cheap) loan. It is always a good idea to seek independent advice.
- Don’t borrow for too short a term
Late interest payments are also reported to the ZEK. An entry at the ZEK can harm your creditworthiness and may make it difficult or even impossible to borrow again in future. You also have to pay penalty interest on arrears, making the loan more expensive. Since personal loans can be repaid at any time, don't borrow for too short a period. Whatever you may have heard, this doesn't necessarily make the loan more expensive. This is because if you repay early, you don't have to make the remaining interest payments. To be on the safe side, borrow for a longer period to reduce the risk of not being able to meet the interest payments. The ideal repayment term depends largely on how much risk you are prepared to take.
- Check whether you really need payment protection insurance
Banks normally recommend that their customers take out payment protection insurance. This is meant to help borrowers if they are unable to service the loan due to unforeseen events like falling sick or losing their job. A perfectly sensible idea. But once again, there are risks. Many borrowers often don't know exactly what their payment protection insurance covers. Before you take out payment protection insurance, you should therefore check if you really need it and whether it would actually cover the risk in your particular case. Because you have to pay additional fees for this sort of insurance, and the policies often specify a waiting period, so borrowers can still find themselves struggling financially despite being insured. In addition, payment protection insurance does not cover your payments in certain cases.
- Steer clear of dubious lenders
The reduction in the maximum interest rate for personal loans has led banks to tighten their credit rating requirements, so customers with an unfavourable risk profile who used to get loans are being locked out of the market. This primarily affects single parents, recipients of child maintenance payments, pensioners and people with temporary residence permits, who increasingly find themselves falling back on dubious lenders. The many dodgy loan offers on the Internet confirm how real the danger is. To avoid unpleasant surprises, never get involved with providers who demand a fee before lending any money. This is expressly forbidden by the Consumer Credit Act (KKG). Another sign that a provider is dubious is when they offer on-the-spot loans. The law insists on a 14-day cooling off period. This is designed to prevent people borrowing too hastily. In addition, lenders who approve loans despite a negative entry with the ZEK and a previous default should generally also be given a wide berth.
To sum up: Personal loans are an attractive financing option for making unplanned purchases or bridging the gap when money is tight. But if you do decide to take out a personal loan, be mindful of main pitfalls in store in the borrowing process.