Interest explained simply – how much do you pay for a loan?

How does interest work exactly? To understand this, we first need to distinguish between two terms: interest rate and interest. The interest rate is the price expressed as a percentage. It does not change during the term. Interest is a specific amount of money.

We also make a distinction between the nominal and the effective annual interest rate. While the nominal annual interest rate only indicates the interest on the loan, the effective annual interest rate also includes additional costs such as processing fees. In some cases, there are clear differences. When comparing loans, you should therefore always pay attention to the effective annual interest rate and prepare a budget for your loan.

When comparing the different credit offerings, there are various interest rate bandwidths. The current maximum interest rate of 12% laid down in the Swiss Consumer Credit Act (CCA) must not be exceeded. A crucial factor for the interest rate is creditworthiness, which is why credit institutions check the solvency and creditworthiness of applicants. But other factors can also have an influence, such as whether the borrower is a homeowner. Furthermore, the interest rate may vary according to the credit institution and the services offered (personal advice, telephone hotline, or adjustment options during the term of the contract, etc.). It's important for the effective annual interest rate to be stated in your credit contract. This is stipulated in the CCA to protect borrowers from hidden costs.

The reason you don't pay the same amount of interest every month is because interest is based on the current amount of outstanding credit, which is reduced by your installment payments from month to month. Consequently, the interest component decreases and the repayment component increases during the term. Credit institutions therefore take these factors into account for the exact loan calculation, calculating the total cost based on the credit amount, the interest rate, and the term.

Affordability is the most important factor when choosing how big your monthly installments should be, in other words, the monthly outlay relating to your loan must be within your budget. It's better to agree to a longer term to ensure you can pay the installments on time.

Speaking of paying on time, BANK-now offers the option of two free payment deferrals during the term, depending on the contract. Contact us and we will be happy to advise you.