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Consumer credit

The law on consumer credit is very strict but is not always applied rigorously. If in doubt, it makes sense to have the loan agreement checked. In our experience, a loan should never be taken out to stave off financial difficulties; careful thought is needed before taking such a step.

 
 

What is consumer credit?

Legally, a consumer credit agreement exists when a professional lender – or credit institution – grants a loan to an individual (the “consumer”) for a reason unrelated to the consumer’s professional activity. The loan may take the form of a cash loan (see: What is a cash loan?), an agreement for financing goods or services (see: What is an agreement for financing goods and services?), a leasing agreement (see: What is a leasing agreement?), a current account overdraft, or a credit card or customer account card (see: Are credit cards, customer account cards and current account overdrafts treated in the same way?). The law on consumer credit applies in particular to loans that cost money (by charging interest or other fees), where the loan repayment is spread over more than three months and the sum lent exceeds CHF 500 but does not exceed CHF 80,000, excluding interest and fees.

 

(Legal basis: Art. 1, 2, 3 and 7 Federal Act on Consumer Credit (CCA))

 

What are the maximum interest rates?

As of July 2016, the interest rate charged on cash loans, agreements relating to goods and services as well as leasing agreements may not exceed 10% per year, including fees. The interest on credit cards and customer account cards, as well as on current account overdrafts, has been limited to 12% per year. The maximum interest rate before July 2016 was 15% for cash loans; this continues to apply to cash loans taken out before that date if they have not been increased (or repaid) since then. Before July 2016, there was no maximum limit on interest charged on other kinds of consumer credit.

 

(Legal basis: Art. 1 Ordinance to the Consumer Credit Act (CCO))

 

What should my loan agreement contain?

Every kind of consumer credit agreement should fulfil certain formal requirements. Cash loan agreements must include the following information:

  • the net amount of the loan (i.e. not including interest and fees),
  • the cost of the loan (amount plus total annual interest plus fees),
  • the maximum amount of the loan if it is not transferred to the consumer at the start of the loan,
  • the number, frequency and end date of the monthly loan repayments, and the total amount of the loan (including interest and fees),
  • the cancellation conditions (termination shortly after the loan has been granted),
  • and finally the amount of disposable income the consumer has available (see: What is a cash loan?) as calculated by the lenders.

Agreements relating to goods and services must also contain a description of the goods and services, as well as information regarding the conditions for transferring ownership (i.e. when ownership of the object actually passes to the consumer).

 

Leasing agreements must also describe the leased object and contain a table stating the residual value of the leased object (estimate of the depreciation in value of the leased object during the agreement) and the amount that will still need to be paid by the consumer if the agreement is terminated early (i.e. in the event of termination before the date stated in the agreement). It should be noted that the amounts due in the event of early termination of the leasing agreement must correspond to the real book value of the leased object. If the agreement is terminated early, the lender is not entitled to make money or penalise the consumer to an extent greater than the depreciation in value of the leased object. If you have any doubts regarding the fairness of the amount stated in the table included in the leasing agreement, you should have the agreement checked by a professional.

 

(Legal basis: Art. 9, 10, 11 and 12 Federal Act on Consumer Credit (CCA))

 

What happens if these formal requirements are not complied with?

If even just one of these pieces of information is missing from the loan agreement, the lender is breaking the law and the interest payments and fees are not payable. Formal breaches have different consequences in the case of leasing agreements.  Here, the leased object must be returned and the monthly instalments payable up to that date are due. However, the lease issuer (lessor) bears any depreciation in value of the leased object.

 

(Legal basis: Art. 15 CCA)

 

Cash loan

 

What is a cash loan?

Within the meaning of the Consumer Credit Act, a cash loan is when a professional lender lends a sum of money to a consumer, and the money must be repaid in an indefinite number of monthly instalments. Interest and fees of up to 10% per year may be charged. The maximum amount for agreements taken out before July 2016 and not renewed (or repaid) since then is still 15% per year (see: What are the maximum interest rates?).

Where several loans have been taken out successively, with each new loan being used to pay off the previous one while adding an additional amount of credit, this is known as a “chain of loans”. The consumer’s budget should be examined in depth each time a new loan is granted. It may happen that the net amount lent exceeds CHF 80,000, excluding interest and fees, after several loans. In theory, such loans would then not be protected under the Consumer Credit Act (see: What is consumer credit?). In certain circumstances, where the limit has only just been exceeded or the umpteenth loan has been taken out despite the legal limit of CHF 80,000, it is possible that the Act may still apply, particularly as regards examining the consumer’s financial capacity in accordance with the strict requirements of the Act (see: What if the budget appended to the cash loan agreement was not examined correctly?).

Certain cash loans do not involve transferring a specified sum to the consumer at the start of the agreement, but instead offer the consumer the possibility of withdrawing a maximum sum during the term of the agreement. This kind of loan is also deemed to be a cash loan within the meaning of the Act. The lender must examine the consumer's financial capacity each time a withdrawal is made, or else the lender is in serious breach of the law (see: What if the budget appended to the cash loan agreement was not examined correctly?). Furthermore, since the number of payments is not specified in this type of agreement, the formal requirements are not being complied with (see: Are there any formal requirements?), so the interest payments and fees for this type of agreement are not payable (see: What happens if these formal requirements are not complied with?).

 

(Legal basis: Art. 3, 7 and 9 CCA)

 

Was my cash loan granted in accordance with the legal regulations?

Before granting a cash loan, a lender must carry out a very thorough examination of the budget of the person requesting the loan.

This is done on the basis of information supplied by the consumer (e.g. loan application, salary slips, tenancy agreement, health insurance premiums). Drawing up a budget of this kind requires professional and practical experience. The purpose of the legislation and the need to calculate the minimum subsistence level under debt enforcement law for certain budget items mean that budgets of this kind cannot be drawn up by inexperienced people. The lender must question the individual consumer in detail regarding all their income and expenditure, and take account of all the information in their file when drawing up a budget. The lender may use the information supplied by the consumer or stated in the documents forwarded by the latter, unless there is any doubt regarding their accuracy. If an item of information is missing or contradicts another item or document, the lender must clarify the situation with the consumer. It should be noted that if the lender draws up a budget that does not reflect reality and has it signed by the consumer, the consumer’s signature does not repair the errors in the budget. Brokers acting as intermediaries for this budget examination are subject to the same rules as lenders.

As regards drawing up the budget, the law refers to the guidelines on calculating the minimum subsistence level under debt enforcement law (see: Debt enforcement/distraint) to ensure that proper account is taken of income, the basic amount (see: Debt enforcement/distraint), alimony payments, health insurance premiums, work-related expenses (particularly transport costs and meals taken while working), childcare costs and the costs relating to access rights if the children do not live with the consumer. However, consumer legislation, the aim of which is to avoid over-indebtedness, has a different perspective from debt enforcement legislation. Lenders have to draw up a realistic budget and take account of actual expenses. The budget must, for example, include real and foreseeable heath costs and not just health insurance premiums, contributions to the costs and the deductible; it must also take account of costs relating to travel to work, including car leasing agreements where applicable, as well as monthly car insurance premiums (physical damage insurance, registration plates, car tax, etc.). In addition to the income and expenses taken into account when calculating the minimum subsistence level in accordance with debt enforcement legislation, it is necessary to add the actual housing costs (mortgage interest, repayments and charges if the consumer is a home-owner), taxes calculated in accordance with the scales in force at the consumer’s place of residence, any commitments and expenses that are known (or ought to be known) to the lender or which are predictable, and the commitments recorded by the Consumer Credit Information Office (IKO) (in German), as well as by the Association for Central Consumer Credit Information Management (ZEK) (in German) (e.g. other cash loans, debit or credit cards where the overdraft exceeds CHF 3,000 for three consecutive months, or leasing agreements).

 

(Legal basis: Art. 22, 25, 26, 27, 28 and 31 CCA.)

 

What happens if the budget appended to the loan agreement was not examined correctly?

As regards the two biggest market players, it should always be assumed that the budget for the loan agreement has not been drawn up in accordance with the legal requirements. Every cash loan should be examined by a professional. For this reason, if there is any doubt regarding the legality of the budget, and therefore of the loan, it is worth filing an objection to any debt enforcement proceedings in order to preserve the time limit, before quickly having the loan examined by a specialist professional (see: How do I get a professional person to check a loan that is probably flawed?). There are indications that a large number of loans have not been granted correctly (see: Bulletin: Flawed cash loans). However, filing an objection may incur expenses if the objection is removed (set aside) (see: Debt enforcement/distraint).

If the granting of a loan constitutes a serious breach of the law, the lender loses any claim to the loan; the lender may not ask for any more money from the consumer, and the consumer may even demand the repayment of all the money already paid. If the breach was minor, only the loan interest and fees are no longer payable.

For a typical example of a serious breach of the law, the breach may in principle be regarded as serious if, once the budget drawn up in relation to the cash loan has been corrected, the monthly payments spread over 36 months can no longer be made in accordance with a budget that complies with the law. However, if, for example, only one budget item has been wrongly calculated and this error does not influence the consumer’s ability to repay the loan, it is generally accepted that a minor breach exists.

 

(Legal basis: Art. 32 CCA.)

 

What is an agreement for financing goods and services?

The law does not define this type of loan, which is a variety of cash loan. Agreements of this kind combine different elements: those relating to cash loans and those relating to the purchase of goods and services, which is why they should contain additional information compared with cash loans, and in particular a description of these goods or services (see: What should my loan agreement contain?).

 

(Legal basis: Art. 10 CCA.)

 

How are agreements relating to the financing of goods and services treated?

The lenders must carry out a budget examination in the same way as for a cash loan (see: Was my cash loan granted in accordance with the legal regulations?). The consequences of breaching the rules on examining the budget are the same as those for cash loans (see: What happens if the budget appended to the loan agreement was not examined correctly?).

 

Leasing

 

What is a leasing agreement?

Leasing agreements covered by the Consumer Credit Act refer to items acquired for a purpose that may be considered as outside the consumer’s commercial or professional activity. Items such as vehicles are typically acquired by means of leasing agreements. Consumers may finance the purchase or use of such items by means of a leasing agreement. Such leasing agreements enable consumers to take possession of and use or enjoy the item thus financed before they have paid for it in full, and often without acquiring ownership of it, usually in exchange for monthly payments. Leasing as such is not defined in law and may take very different forms.

 

(Legal basis: Art. 11 CCA.)

 

Was my leasing agreement granted in accordance with the legal regulations?

The law also requires the lease issuer (or “lessor”) to carry out a thorough examination of the financial circumstances of the person taking out the leasing agreement (the “lessee”), before the agreement is concluded. The only difference compared with the examination specified for cash loans (see: Cash loans) is that it is not necessary for a consumer to be able to repay a leasing agreement within 36 months in order for the agreement to be legal. In other respects, the budget examination is identical (see: Was my cash loan granted in accordance with the legal regulations?).

 

(Legal basis: Art. 29 and 31 CCA.)

 

What else should be checked?

The leasing agreement can always be terminated early, before its end date, by giving notice 30 days before the end of any three-month period of the agreement, regardless of what the agreement states (see: What should my loan agreement contain?). The basic agreement should always clearly state how much the lessee will have to pay in addition to what has already been paid, in the event of early termination. It should also include a table which states the residual value of the leased object at the end of the agreement. In other words, the depreciation in value of the leased object during the agreement must be laid down in the agreement from the start. In reality, this table often only gives a coefficient for use in the event of early termination of the agreement, in which case the difference between what has already been paid and the total leasing payments are multiplied by this factor. It is important to check whether the indemnity amount payable in the event of early termination of the agreement contains a hidden penalty, which is often the case in practice. Such indemnity payments are particularly unfair if the cost of withdrawing from the agreement exceeds the actual depreciation in value of the leased object returned to the owner; the resale price should be deducted from the consumer’s final invoice if the object is sold on.

 

(Legal basis: Art. 11 and 17 CCA.)

 

What happens if the budget appended to the leasing agreement was not examined correctly?

If the examination of the financial circumstances of a lessee is in serious breach of the rules, such as when the budget calculated in accordance with the law does not permit the lessee to make the monthly payments specified in the leasing agreement, the consequences will depend on the terms of the leasing agreement. In any case, the consumer, or lessee, should not make any further payments to the lessor. The lessee will even be legally entitled to demand the return of the sums already paid. On the other hand, the lessee will often be required to return the leased object to the lessor, depending on what was specified in the basic agreement as regards the transfer of ownership. If the leased object is returned, the lessor bears its depreciation in value. A minor breach of the rules incurs the loss of the interest payments and fees, so the consequences are similar to those incurred by formal breaches of a leasing agreement (see: What happens if these formal requirements are not complied with?).

 

(Legal basis: Art. 32 CCA.)

 

(Gesetzesgrundlage: Art. 32 KKG)

 

Other informations about credits

 

Are credit cards, customer account cards and current account overdrafts treated in the same way?

The law does not define these types of credit, even though they are commonplace. Although this is less likely to happen, the consumer’s budget should also be examined in relation to credit cards, client account cards and current account overdrafts if the agreements allow the balance to be repaid in several instalments. The consumer’s circumstances in terms of income and assets should therefore be examined on the basis of the information they have provided. This implies that the lenders should ask the consumers some questions. When drawing up this budget, they should also take account of any loans reported to the Consumer Credit Information Office. The credit limit should always be stated clearly in this type of agreement.

 

Here again, in the event of a serious or minor breach, the credit institutions will no longer be able to claim all or part of the loan, the advance or the interest and fees.

 

(Legal basis: Art. 30, 31 and 32 CCA.)

 

What is a credit broker?

A credit broker is a professional who acts as an intermediary when a consumer credit agreement is concluded between a consumer and a lender.

The activity of a broker, like that of a lender, is subject to authorisation – usually at cantonal level. However, in the same way as for lenders, the activities of brokers are not generally monitored once authorisation has been granted.

Brokers act on behalf of lenders and are remunerated by the latter, who remain responsible for the actions of the brokers if they act as intermediaries when a consumer credit agreement is concluded, especially as regards drawing up a budget. The lenders are therefore accountable for the actions and errors of the brokers.

The law forbids brokers to accept remuneration from consumers.

 

(Legal basis: Art. 4, 35 and 39 CCA, Art. 6 CCO.)

 

Participatory lending platforms (“crowdlending”)

Participatory credit brokers are subject to consumer credit legislation. These are generally companies which use electronic platforms to bring together loan applicants and non-professional individuals who are willing to finance all or part of the loan by means of financing arrangements that vary from agreement to agreement. Just like professional lenders, participatory credit brokers have an obligation to examine the applicant’s capacity to enter into a loan agreement (see: Was my cash loan granted in accordance with the legal regulations?).

 

(Legal basis: Art. 1, 2, 4, 7, 27a, 31, 32a and 39 CCA, Art. 3 and 4 CCO.)

 

What is credit insurance?

Insurance policies offered together with a loan are usually optional. They are intended to cover the monthly loan instalments in the event of incapacity for work, illness, disability, unemployment or death. This kind of insurance agreement can usually be terminated at any time, in accordance with the general terms and conditions. On the basis of various insurance agreements examined by our service, we note that it is often difficult to obtain payment of monthly loan instalments under such policies, and any payments made are generally limited either in time, by amount or in accordance with other criteria. We have also noticed that some credit institutions offer insurance policies that are not linked to the loan when loan agreements are concluded. If the credit institution is aware of the existence of an insurance policy, or it acted as an intermediary between the insurer and the consumer, it must take account of the monthly insurance premiums in the loan budget. If a policy covering the repayment of all or part of the loan in the event of death, disability, illness or unemployment is a condition of granting the loan, the insurance costs form part of the loan.

 

(Legal basis: Art. 34 CCA.)

 

What should I do if I suspect a loan was not granted legally?

The first thing to do before investigating how a loan was granted is always to ask the lender, in writing, to supply all the documentation relating to the loan – specifically: the loan application with the information gathered at the start of the relationship, salary slips, and extracts from the Consumer Credit Information Office.

If, despite repeated written requests, you do not obtain the requested documents and information, or you do not obtain all of them, you can apply to the Banking Ombudsman if the other party is a bank. The Ombudsman will then be able to intervene with the bank concerned.

 

(Legal basis: Art. 8 Federal Act on Data Protection (FADP).)

 

How do I get a professional person to check a loan that is probably flawed?

Once the documents and information requested have been received, apply to a specialist solicitor or lawyer. There are not many specialist professionals available at present. Given the complexity of this type of examination, it absolutely must be performed by a professional with experience in this area.

A professional will check whether the budget has been drawn up in accordance with the legal requirements. They will sent a letter of objection to the credit institution, recommend filing an objection to any legal proceedings if necessary and consider instituting legal action if appropriate. The possibility of taking the case to the Banking Ombudsman may also be considered.

 
 

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