The battle for personal loans market share is peaking. On the one hand, the number of online lenders entering the Swiss market is on the uptake. On the other hand, demand for personal loans by consumers is hardly increasing.
According to the ZEK credit bureau, around 116,650 new personal loans which fell under the consumer credit law were granted in 2017. In 2016, that number was around 112,850 loans and in 2015, around 117,115 new personal loans were granted. The number of outstanding personal loans decreased somewhat: 317,145 existing loans were being serviced in 2017 compared to 321,250 in 2016, and 333,910 in 2015. Only the average loan amount increased slightly year-over-year: in 2017, the average amount borrowed per new loan was around 32,150 francs.
Low-interest offers: More competition
The increased competition and the legal maximum annual interest rate of 10% for personal loans continue to benefit borrowers in that they are continuing to drive down loan interest rates. However, the differences between the interest rates used by different lenders remains significant, as the moneyland.ch analysis shows. “Competition in the personal loans business has primarily benefited borrowers with good creditworthiness,” says moneyland.ch analyst Michael Burkhard. “Both new and conventional lenders are competing to attract customers with good credit by advertising lower minimum interest rates in increasingly-noticeable marketing campaigns.”
Fighting for customers using marketing campaigns
Established lenders are using special promotions to regain brand awareness in a struggle to prevent losing market share to newcomers. Migros Bank, for example, is offering a discount of 20 percent – but only for loans of 5000 francs on up or refinancing of 10,000 francs or more. Migros Bank has not disclosed the date on which the promotion will end.
The recent marketing campaign by online lender Creditgate24, which captured the media with a personal loan at a negative interest rate, was even more provocative. But those who read the fine print would have noted that the promotion came with numerous limitations. The promotion was only valid for two weeks and only applied to loans of 5000 francs or more with a 12-month loan term. Additionally, only borrowers with excellent credit were eligible and only a limited number of loans were available at the advertised rate. That means the lender alone could decide how many loans would be provided as part of the promotion. “Avoid being swayed by marketing campaigns and always read the fine print,” suggest moneyland.ch CEO Benjamin Manz.
Major differences in interest rates across Swiss personal loans
For many years, Migros Bank with its interest rate of 5.9% for online loans offered the cheapest Swiss personal loans. Those days are over, and today several conventional and online lenders offer cheaper personal loans. Personal loans with annual interest rates of 4.5% are now available to borrowers with excellent creditworthiness.
Effective annual interest rates offered by conventional lenders range between 4.5% and 9.95%, while those available on peer to peer loan platforms range between 4.5% and 9.9%. That makes the most expensive loan more than twice as expensive as the cheapest loan. The rule of thumb is: the better the borrower’s creditworthiness, the lower the interest rate and subsequent cost of the loan. However, interest rates offered to the same borrower can vary broadly from lender to lender.
Annual savings potential of 160 million francs
The cheapest option is always to avoid getting loans altogether. But if you do not want to forego getting loans or if you are already servicing a loan, make sure to compare the current conditions of loan offers. Many borrowers can drastically reduce costs by switching to loans which have lower interest rates for their profiles.
A high estimate by moneyland.ch show that if all borrowers would switch from their existing loans to the best available loan offers available for their creditworthiness, they could potentially save 160 million francs in loan costs. That comes to around 500 francs of potential savings per personal loan, not accounting for installment loans, credit card loans, current account loans and private account overdrafts.
Understated loan costs
Many borrowers underestimate the costs of personal loans, explains Benjamin Manz. This example shows how much loans can cost: A 30,000-franc personal loan with an effective annual interest rate of 9.95% costs 3066 francs over a 24-month loan term and 6194 francs over a 48-month term. The longer the loan term, the higher the loan costs. “Because of that fact, borrowers should choose the shortest loan term that is realistically viable,” says Manz.
Early repayment saves money
Repaying a loan early if you are financially capable of doing so is recommended. This example shows how doing so can save you money: If a borrower were to repay a 30,000-franc loan with a 9.95% effective interest rate in full within 24 months rather than within the predetermined term of 48 months, they would save 1700 francs in interest charges. If all borrowers in Switzerland were to repay their personal loans within half of the term-lengths specified in their loan agreements, they would collectively save around 190 million francs – approximately 600 francs per loan – in loan costs, as per a high estimate by moneyland.ch.