The Federal Council’s decision will lower the maximum interest rate for a consumer loan in July 2016 from 15% to 10%. Why was this decision made and what are the consequences for consumers?
In Switzerland, banks are free to choose their interest rate as long as it does not exceed a maximum. This limit was 15% in 2015 and will be limited to 10% in 2016. The official goal is to reduce the indebtedness of certain households by limiting the budget available for repayment.
The concept of risk
What does an interest rate cover? First of all, the interest rate on a loan covers the costs of the lender’s functioning: employee wages, premises, administrative costs, … These elements have a price that, generally speaking, is “paid” by borrowers. The interest rate generally also covers the risk. If the repayment is not made, the lender loses the money. The interest rate thus also secures the company’s losses caused by insolvent people.
Consequences for the banks
With a lower maximum interest rate, banks have fewer options to hedge the risk of default. The Federal Council hopes that the banks will be less likely to grant loans and thus reduce the debt risk. However, this consideration forgets two important elements:
- It is not always easy for a bank to determine the creditworthiness of its customers for the future. In the face of unemployment, changing jobs and other changes, the customer’s financial situation can quickly change.
- To ensure risk coverage, banks are forced to impose new costs on customers that do not yet exist.
Probable consequences of the limitation
It is difficult to accurately predict the consequences of this law. In any case, the banks must ensure that they function properly. If a maximum interest rate of 10% is not enough to guarantee this, it is likely that the banks will start to compensate for their losses:
- Either by increasing the duration of the repayment: as a reminder, the interest cost of a payday loan depends on the interest rate, but also on the duration of the repayment. A 4 year loan is twice as expensive as a 2 year loan. It is therefore sufficient to conclude a contract for a longer period of time to compensate for a lower interest rate.
- Or by inventing additional costs: dossier fees, processing fees, consulting fees …
In any case, it will be better to wait for the reactions of the banks and to watch the development of the offers before making a decision. However, the best thing is always to contact a specialized insurance advisor. Do not hesitate to contact our borrowing partner for a free, no obligation meeting with a specialist.