From July 2016, the maximum interest rate for consumer credit in Switzerland will be lowered from 15% to 10%. What will be the real consequences for consumers? Will they really be better protected thanks to this lower interest rate?
The Federal Council amended the ordinance on the maximum interest rate for consumer credit on December 11, 2015. The federal authorities hope to protect consumers who would not be able to assume debts by lowering the maximum rate from 15% to 10%. However, this reduction does not appear to be necessary for consumer protection since there are already strict measures:
- Strict regulations set by the law on consumer credit.
- Rigorous control of the applicant’s solvency by the bank.
Profitability of funding institutes
Credit represents above all a risk on the side of the banks since it involves advancing a sum of money to an individual who does not yet have it. In order to assume a loan whose repayment is guaranteed for a future that they do not control, they must obtain guarantees provided by:
- Thorough verification of the financial and professional situation of the consumer credit applicant.
- Concrete evidence such as salary statements and a certificate from the prosecution office.
It is only after validation of the applicant’s creditworthiness that the banks grant their confidence for a consumer credit. Moreover, the rate of allocation of credits is low compared to the number of requests.
What is the cost of consumer credit used for?
The fixing of the interest rate determined by the bank includes two types of costs borne by the financial institution:
- Operating costs, such as administrative management.
- The cost of risk, namely lending a sum of money that the consumer will only have in the future.
How to continue the good coverage of bank costs?
These costs, necessary for the proper financial functioning of banks, are fixed. What will happen if the rates drop? In order to continue to cover costs, banks will have to use other financing solutions to cover their costs. For example, there could be:
- The establishment of administrative fees.
- The increase in the duration of the credit.
The drop in the interest rate for consumer loans decided by the Federal Council in December 2015 does not appear to be a necessary tool for protecting consumers’ debt.
Advice to credit applicants
Do I have to wait for the entry into force of the new interest rate for consumer credit before applying for credit? The best thing is to call in a specialist advisor. Our partner Funding Square Bank, for example, will be able to offer you a complete analysis of your situation and your borrowing possibilities.