The first thing that comes to mind when considering a personal loan is to check and compare the interest rate. Agencies are well aware of this, and are proposing lower and lower rates... which do not reflect the real cost of a loan. Our explanation.
Since mid-2016, the Swiss Confederation fixed a maximum rate of 10% for private loans. Before that, it was usual for loans to come with a 11.9% or higher interest rate. Since then, all offers are below 10%, and there are agencies offering loans with rates as low as 6.9% or even lower. However, the consumer has no insurance to pay less interest in the end. Indeed, the total cost of a personal credit depends on the repayment duration as well.
The planned repayment duration has an influence as important as the rate over the total cost of a loan. Indeed, the cost is proportional to the duration! A 24 months loan will cost twice as much as the same loan over 12 months. Of course, a longer period means lower monthly bills, which allows the lender to adapt its offer to the customer.
However, the approcach is more questionable when the lender offers a lower interest in order to attract more customers, while compensating with a longer duration. The consumer will then be left, for example, with a 24 months contract when he could pay in 12 months only!
One has only to look at the figures to see that a lower interest doesn’t always mean a lower cost. For example, a couple wants to borrow 20,000 Chf over 24 months, and torns between two offers:
It seems intuitive to choose the second offer. But is it really the best choice? Here is a summary table of the total cost of the loan (the paid interest), without taking account of the monthly bill.
|Rate||24 months||36 months|
|5.9%||1’219 Chf||1’821 Chf|
|6.9%||1’424 Chf||2’130 Chf|
|7.9%||1’628 Chf||2’439 Chf|
|8.9%||1’831 Chf||2’747 Chf|
In the end it is actually the first offer that is the most economical solution, namely 1,831 Chf instead of 2,130 Chf. This represents a saving potential of nearly 300 Chf! Of course, the second offer comes with a much lower monthly bill, but if the couple can afford a loan over 24 months, the first offer is really the best choice!
The best, before commiting, is to compare the offers by considering the rate, but the repayment duration as well. It is also possible to use the services of a loan company like Multicredit. Indeed, an agency will help you to compare offers and get the best proposition available on the market.