Banking News

Loans: Will Interest Rates Drop?

May 27, 2015 - Benjamin Manz

In Switzerland, annual effective interest rates for loans are limited to a maximum rate of 15 percent as stipulated by Swiss consumer credit law. This limit applies both to personal loans and to credit cards. Compared to similar regulations in other countries, limitations imposed by the Swiss Consumer Credit Act are fairly strict.

New limit on the maximum interest rate

In December 2014, the Federal Council announced the lowering of the maximum interest rate from 15 percent to as little as 10 percent, in keeping with an amendment to the Consumer Credit Act (KKG/LCC).

To be more precise: The Federal council proposed an annual adjustment, based on the time at which the loan agreement was signed. During the loan tenure, the interest rate remains constant. Adjustments will use the 3-month LIBOR as a base rate to which 10 percentage points will be added. The result will be rounded off to the nearest whole percentage point.

If the LIBOR were 0%, the maximum permissible effective interest rate would be 10%. However, according to the Federal Office of Justice it is unlikely that maximum interest will also account negative LIBOR rates (like the current LIBOR). Because of this, maximum interest rates of 10% currently represent the lowest possible limit.

On the flip side, if the 3-month LIBOR were to reach 5.45% (for example) in the future, the current 15% limit could be raised because the rule announced by the Federal Council makes allowance for increases. The logic behind this is that the cost of refinancing credit institutes climbs or falls depending on the overall interest rate environment.

The 10 percentage points added to the LIBOR rate account for the following costs that Swiss lenders incur when providing a loan: risk costs (for a default on loan repayments, for example: 0.5% to 1.5%), administrative costs (3.5%-5.5%), customer acquisition and marketing costs (1%-1.5%) and financing costs (varies with interest rate environment, currently 0.6%-1.2%). According to this calculation, the minimum cost of providing a loan would be 5.6% and the maximum cost would be 9.7%.

When, how and whether the new maximum interest rate limit will be implemented is, as yet, unclear. But major financial services providers like Cembra Money Bank are already preparing for possible scenarios and creating new guidelines. followed up with the Federal Office of Justice, which stated that the Federal Council may reach a decision on the implementation of the maximum interest rate for consumer loans as early as the second half of 2015. What that means is that new interest rate limits may come into effect as early as January 1, 2016.

Editor’s note: On December 11, 2015, it was announced that new regulations will apply as of July 1, 2016.

New maximum interest rate: consequences?

A statement by the Swiss association of credit banks and finance institutes, VSKF/ASBCEF, suggested that if the new limitations are imposed, loan applicants with poor credit would no longer be able to access consumer loans. Judging by today’s credit landscape, that would be the case. Currently, major lenders like Cembra Money Bank, Bank-now and (to some extent) Cashgate provide loans to borrowers with poor creditworthiness at interest rates higher than 10 percent.

According to estimates made by the VSKF/ASBCEF, reducing the maximum interest rate to 10 percent would cut down the current consumer loan market from its current level of around 7.5 billion francs to between 5 and 5.5 billion francs.

However, a number of alternative scenarios are imaginable. For example, a general rate adjustment across lenders could result in repricing, which could bring benefits to certain borrowers. While those with the poorest credit would not be able to access personal loans at all, borrowers with poor (but not extremely poor) creditworthiness could benefit from maximum interest rates of just 10%.

Loan interest rates for medium-risk groups, on the other hand, could climb to 10 percent in order to compensate. Even loans for those with excellent credit could become more expensive in response to subsequent market changes. The reason for this is that lenders price their offers in relation to offers provided by other lenders. The rates offered are of relative importance. If lenders across the spectrum raised their rates, low-cost loan providers would be able to raise their rates without losing their competitive edge.

Additionally, the amount of unofficial loans like private loans (or even black market loans) provided will likely increase.

Meanwhile credit card users may be hit with higher credit card fees due to new regulations aimed at lowering interchange fees.

Loan advertising: additional restrictions

Because the maximum mark-up on the 3-month LIBOR is not yet fixed at 10 percentage points, there is a chance of less drastic options (like 12, 13 or 14 percentage points) making their way into final regulations. Industry association Economiesuisse has proposed that a longer-term reference rate be used in place of the 3-month LIBOR.

An additional limitation, which is also supported by the industry association, could affect loan advertising. These regulations would limit the aggressive marketing of loans.

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Expert Benjamin Manz
Benjamin Manz is CEO of and an independent expert on banking and finance.