Loan interest rates: how interest is incurred and its influence on costs
Not all the criteria for obtaining a particular rate or being approved by providers are available to the general public. Therefore, you should not simply focus on the lowest interest rate when selecting a provider.
How is the interest rate determined?
Interest rates vary depending on the lender: some institutions have fixed interest rates. Others agree on an interest rate between the minimum and maximum range of interest rates in the loan agreement.
In order to determine your interest rate, lenders will review your personal and financial situation in detail. Certain eligibility criteria and risk factors determine not only whether you’ll be approved for a loan, but also under which conditions. In general, the lower the interest rate, the stricter the eligibility criteria. Which bank will grant the loan and at which interest rate usually depends on the credit check.
Comparis tip
Lenders put out advertisements featuring their lowest interest rates, currently starting at 4.5%. But be aware: these attractive but largely unobtainable rates are only awarded to people with an excellent credit standing and under special conditions.
Learn more about the criteria for granting loans
What is the maximum interest rate for loans in Switzerland?
The maximum interest rate is the legally defined maximum rate of interest that lenders are allowed to charge for providing a loan.
Since 2016, this has been defined and reviewed annually by the Federal Council in the Ordinance on the Consumer Credit Act (link not available in English). This ensures that the refinancing costs of the lenders are taken into account. Since then, the maximum interest rate for consumer loans has been 11%.
What is the “effective annual interest rate”?
The effective annual interest rate describes the cost of the loan in annual percent. By law, it must be listed in the consumer credit agreement and take into account all the costs of the loan. If this is not possible, these costs must be listed separately.
Additional charges
Nevertheless, lenders are permitted to charge fees for services that are not directly connected to the loan costs, such as payment reminders, address searches or administration costs for early contract termination.
Tip: 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.
Choose your repayment term
In Switzerland, lenders offer terms from 6 to 120 months. The longer the repayment term, the higher the interest payments. It’s important to pay your instalments on time. For this reason, we advise you to give yourself some financial buffer when making your calculations. Late payments and debt repayment plans will impact your credit standing. If you miss payments, the lender may choose to terminate your contract.
The best solution is to play it safe: choose a longer repayment term and pay more than the minimum instalments. According to Swiss law, you can always pay back your loans early, which will lower the amount of interest you have to pay.
Comparis tips:
Be realistic about your budget.
Give yourself some financial buffer for one-off expenses.
Choose a longer repayment term.
Pay more than the minimum whenever possible.
How are loan payments calculated?
The factors used in a loan calculation are the loan amount, interest rate and repayment period. The repayment period determines how high the monthly instalment is. If you choose a longer period, the monthly repayment is lower. However, bear in mind that the outstanding loan amount will remain higher for longer. This increases the interest costs and therefore the overall cost of the loan.
| Loan A | Loan B | |
|---|---|---|
| Loan amount | CHF 20,000 | CHF 20,000 |
| Effective annual interest rate | 6.9% | 8.9% |
| Duration | 48 months | 48 months |
| Monthly instalment | CHF 476.06 | CHF 493.50 |
| Overall cost of the loan | CHF 22,851.00 | CHF 23,687.92 |
