Consumer loans are suitable for raising additional budget at short notice, for example to finance a desired project or further training or to increase the financial scope. Taking out a loan involves additional costs – how high it depends on the offer – and the differences are sometimes enormous. So what do borrowers have to watch out for to avoid unnecessary costs?
Consumer Loans – What Does the Law Say?
In Switzerland, the consumer credit law regulates the legal framework for private loans that are larger than $ 500 and smaller than $ 80,000. In addition to the content requirements for a credit contract or the rights and obligations of the contracting parties, it also specifies which interest rate is permissible for a consumer loan.
The effective annual interest rate for cash advances is currently set at a maximum of 10 percent. A maximum of 12 percent may be requested for overdrafts on credit cards. Initially, these interest rates are binding until the end of 2019.
Total cost of a loan – how are they made up?
The cost of a loan arising next to the APR of the loan amount and the repayment term. This three pieces of information can be used to easily determine the total cost to be paid back when taking out a loan.
While borrowers choose the amount and term themselves, the lender determines the APR. This is a personalized interest rate that is determined in a credit check, primarily based on the borrower’s credit rating.
Important to know: The annual percentage rate already takes into account all costs of the loan, such as processing fees. This standardization, which is required by law, makes it easy to compare different loan offers. In this way, consumers can use a credit comparison to identify the cheapest provider at a glance.
Interest rates for consumer loans are currently between 4.9 percent and 10 percent for most Swiss credit providers. At Agree Bank, top borrowers currently receive an interest rate of 3.5 percent, which is the most favorable rate in Switzerland. One quickly realizes that the choice of the provider can save several hundred dollars.
A cost example illustrates the potential. A consumer loan of over 30,000 dollars with a term of 24 months costs borrowers a total of 1,829 dollars with an effective interest rate of 5.9 percent. With the cheapest interest rate on Agree Bank of 3.5 percent, the interest costs for the same loan are only 1,088 dollars. This corresponds to savings of $ 741. So it’s worth comparing.
Term and loan amount – what should you watch out for?
By choosing the term and amount, borrowers have an impact on the total cost of a loan. The following applies: the higher the amount borrowed, the higher the cost of the consumer loan. The same applies to the runtime. In order to save costs, it makes sense to choose both factors as low as possible.
However, one should not be guided solely by the costs when making the choice.
The loan amount should initially be based on the intended use. A car loan usually requires more money than buying new furniture. If the exact costs are already known, the loan should be applied for at least this amount.
Borrowers often make the mistake of not planning enough financial leeway. Especially with low monthly incomes, it makes sense to avoid financial bottlenecks during the loan term by taking up a higher loan amount.
The same applies to the choice of the term. Many borrowers are tempted to choose these as small as possible in order to save costs.
However, a shorter term leads to higher rates for the same amount. Another example to clarify: While the monthly repayment for a loan of over 30,000 dollars with a term of 36 months and interest of 3.5 percent is just under 880 dollars, this amount increases to over 2500 with a term of only 12 months dollars a month. Depending on the monthly income, the financial scope in this case decreases drastically.
For this reason, borrowers should think carefully about the financial scope they need during the term of the loan, take into account further planned and unforeseen costs and choose the loan amount and term accordingly.
We at Agree Bank would like to offer our borrowers an individually tailored loan at the most favorable terms. The Agree Bank team is always available to help and answer any questions you may have. So please feel free to contact us.