Since 2003, the maximum annual effective interest rate (EIR) that lenders can charge for credit card balances has been limited to 15% by consumer financial protection laws.
But as of July 1, 2016, these limits have been changed, as per a rule approved by the federal council.
The ultra-low interest environment has been cited as the reason for the move. Lenders make a profit on the difference between what it costs them to borrow money and what it costs you to borrow the same money from them. Lenders make large profits when overall market rates are lower, because lenders can borrow money at a lower cost, but only as long as the rate at which they lend money remains unchanged. In recent years, lenders have enjoyed much higher profits than they have in times past.
As well as preventing profiteering lenders from taking advantage of consumers, the Federal Government also believes that lower maximum interest rates will discourage lenders from issuing high-risk loans.
Loans In Switzerland: New regulations
The new regulations specify that the cap on maximum interest charges must be adapted to market conditions on an annual basis. In practice, this means that the maximum interest rate for personal loans is set at 10 percentage points above the going 3-month LIBOR rate (rounded off to the nearest whole number). However, the maximum interest rate for cash loans cannot fall below 10%, regardless of LIBOR rates.
A separate maximum interest rate applies to credit cards (the decision appears to be a political one). In the case of credit card interest rates, 12 percentage points are added to the going 3-month LIBOR rate. Minimum credit card interest rates cannot fall below 12%. This maximum interest rate also applies to overdraft balances in bank accounts (because these typically are not carried over longer than 3 months, consumer credit law does not normally apply).
The new regulations only apply to loans issued from July 1, 2016. Loans issued before that date are not affected by the new maximum interest rate regulations.
It’s possible that, if the LIBOR were to rise significantly in the future, the maximum interest rate may be set above 15%. Legislators deliberately left certain aspects of the rule open to interpretation just in case.
Maximum interest rates for the coming year will be set in October of the previous year. But an inquiry by moneyland.ch revealed that the Federal Department of Justice hasn’t ruled out the possibility of interim changes to rates.
A whole range of new regulations related to lending have already been in effect since January 1, 2016.
Loan rates compared
A quick look at current interest rates shows that Swiss Banks and other lenders take advantage of allowances for interest rates to varying degrees. Many financial institutions already provide loans with effective interest rates of less than 10% per annum. Migros Bank leads with its low 5.9% EIR, followed by Eny Finance with an annual EIR of 6.9% to 8.9%. The Swiss Bank of Geneva (Banque Cantonale de Genève - BCGE) and the Banque Cantonale du Jura both offer loans with a 6.9% EIR per annum.
Cashgate, which issues loans for a number of cantonal and regional banks, offer a loan with a 7.9% EIR and another at 11.9% for less creditworthy borrowers. bob Finance offers an 8.9% EIR per annum loan.
Interest rates on loans from Bank-now range from 9.9% to 14.5%, depending on your creditworthiness. Similarly, the Cembra Money Bank offer loans with EIRs of 9.9% to 14.5%. So curiously enough, virtually all lenders will already issue loans with interest rates lower than 10%. The basic rule: The higher your creditworthiness, the lower an interest rate you can get, and the stricter the criteria for obtaining a loan will be.
The Migros Bank offers the lowest interest rates on loans, but only accepts loan applicants with excellent creditworthiness to minimize the risk of default. So many borrowers are not able to profit from the cheapest loans available. On the contrary, lenders like Cembra Money Bank charge a higher interest rate, but provide loans to people with much poorer creditworthiness.
Credit cards: Interest rates explained
Unlike charge cards or prepaid payment cards, credit cards charge let you borrow money and carry your debt forward indefinitely. Prior to the new regulations, depending on your card and issuer, the interest rate charged on your balance (also known as the APR) would have been anywhere from 9.5% (PostFinance) to 14.9% (Bonuscard) or 14.93% (Viseca), up to the former maximum legally permissible interest rate of 15% (Cembra Money Bank, Cornèrcard, UBS). This interest rate also affects cardholders who don’t make their payment on time. Because many credit card users don’t set up a recurring transaction to cover at least their minimum credit card payment, this is a fairly common occurrence.
Interest rates: What has changed?
Unless LIBOR rates shoot up within the next couple of months, effective interest rates for personal loans will remain capped at a maximum of 10%, down from the former limit of 15%. Interest rates on credit card balances are capped at 12%. For the foreseeable future, LIBOR rates will likely remain negative.
The new regulations have force practically all credit card issuers (with the exception of PostFinance) to cut interest rates.
Additionally, lenders like Cembra Money Bank, bank-now and Cashgate have had to revise their interest strategies in favor of lower rates. In the worst case, borrowers with very poor credit will no longer be able to access loans. But on the bright side, most borrowers can now enjoy much more affordable loans.
Are custom rates the new trend?
The use of flat-rate interest charges will likely decline in the future. We can expect to see more lenders offer multiple interest rate tiers based on borrowers’ creditworthiness.
“The Swiss lending industry is also trending towards a higher level of customization” according to moneyland.ch CEO Benjamin Manz. New online tools for checking credit now allow lenders to more accurately measure an applicant’s creditworthiness and set interest rates to match.
The worry that, with the implementation of lower interest rates, people with bad credit will be forced into the “black market” isn’t completely founded. However, there is the risk that some borrowers will be tempted by the many fraudulent loan offers making their way around the Internet. These generally demand a prepaid “deposit” in exchange for a loan with very favorable terms which the applicant never receives. “This kind of online fraud must be prosecuted more diligently” according to Manz.