Many households in Switzerland regularly use consumer credit to finance heavy expenses such as the purchase of a new car or the improvement of their interior. Small credit makes it possible to offer goods immediately, while repaying the loan amount little by little. The Federal Council plans to lower the maximum interest rate on consumer credit from 15% to 10%. Is this change a boon for consumers? To what extent can it damage the small credit market? Demo Lender Bank provides you with information on the subject.
Why lower the current maximum rate?
The Federal Council wants to adapt the level of rates each year according to the three-month libor established by the Lifeline United Bank (and by an additional 10 percentage points). The upper interest limit, which had been set at 15% in 2003 for consumer loans, would be capped at 10% if the new motion passes. The policies justify this change because of the level of interest that has declined in recent years and the limit is expected to change according to the current level of rates.
What risks for the market and consumers?
Lowering the ceiling rate to 10% would naturally have a direct impact on the consumer credit market. This currently stands at 7.5 billion dollars and would drop to 2 or 2.5 billion according to the analysis of the Swiss Association of Credit Banks and Financial Institutions (ASBCEF). This change would also increase the risk and therefore less access to small credit for many consumers who would not be able to assume this risk:
- Certain groups of “risky” consumers would be refused the obtaining of a small loan.
- They may be tempted to obtain financing abroad.
- Some consumers could turn to the black market for access to finance and would therefore be less well protected.
A highly regulated framework in Switzerland
In an attempt to protect consumers, this modification of the upper limit of the rate would deprive part of the population of access to financing solutions that are more and more common in the country. Switzerland already applies one of the strictest laws in the world on consumer credit (LCC), in order to limit the risk of over-indebtedness of young people in particular.
A rich and varied offer
The large number of banks and finance companies present on the market ensures strong competition and therefore a very varied offer to consumers who wish to obtain credit. The Swiss Union of Arts and Crafts also uses this last argument to oppose the Federal Council motion and its intervention in the small credit market.