Swiss Debt Capacity Requirements Explained

There is a long list of legal regulations which must be adhered to when offering consumer loans. This guide explains how much you can borrow and how debt capacity calculations work.

What is a consumer loan?

Consumer loans are loans which are not used to finance professional or business activities. Consumer loans are only offered by commercial lenders (banks, for example). Only loans of between 500 and 80,000 francs with loan terms of at least three months qualify as consumer loans under the consumer credit law.

The debt capacity calculations described here apply to cash loans. Rules for other kinds of consumer loans are not as strict.

Can I borrow any amount of money I choose?

No. You can only borrow as much money as you are able to repay, as per certain criteria. In concrete terms, the law dictates that, in a worst-case scenario, you would need to reduce your expenses to the minimum required to live on, and use the rest of your income to repay your debt. In this case, you would have to have enough spare money to repay the loan within 36 months. If you would not be able to, then the loan is too big.

So the maximum size of the loan you could get depends primarily on how high your income is. The higher your income is, and the more of it is seizable income, the more money you can borrow. You are considered creditworthy if you are able to repay a loan with the part of your income which is seizable.

Why are debt capacity checks necessary?

Debt capacity checks are mainly meant to prevent you from borrowing more money than you can realistically repay. So checking your debt capacity is in your best interest as a prospective borrower. That is even true when a debt capacity check results in your not being able to get the loan you want.

How do debt capacity checks work?

When you apply for a loan, the lender has to create a budget for you. Normally, you have to fill out a form with your financial information, and then sign it and return it to the lender.

How is debt capacity determined?

The part of your income which can be used to repay a loan is called your discretionary income. On the other hand, there is the unseizable portion of your income which you need to cover the basic expenses in order to secure your existence as per poverty guidelines.

In order to determine whether or not you would be able to repay a loan using only the seizable portion of your income, the lender has to calculate your budget. The creation of this budget is called a debt capacity check. The budget must record your total income. According to the Swiss consumer credit law (KKG), the lender needs to use the poverty guidelines applicable to seizable income as their guide when calculating your budget. The requirements vary slightly between cantons, but in most cases, lenders are required to determine these factors:

• Basic expenses: This point includes necessary spending on groceries, clothing, hygiene and healthcare, furniture maintenance, private insurances, cultural spending, and electricity and gas bills. Basic expenses are normally estimated at 1200 francs per month for a single adult, 1350 francs per month for a single parent, and 1700 francs per month for a married couple or registered partnership. Additional allowances for kids apply: 400 francs per child up to 10 years old, and 600 francs for each child above the age of 10.
• Rent: This is calculated using the actual rent you pay for your home, rather than a fixed amount. Expenses like electricity which are already included in your basic expenses are not included in rental calculations.
• Interest on mortgages: If you own your home, then the basic living expense calculation accounts for the interest you pay on your mortgage (without amortization payments), as well as taxes and maintenance costs related to your home.
• Heating and supplementary rental costs: The average annual cost of heating and the supplementary costs you pay along with your rent are calculated separately.
• Social security: Contributions to social security also fall under your basic living requirements. These include payments to the OASI, DI, EO, unemployment insurance, mandatory health insurance, accident insurance, pension funds and providence schemes, and professional associations. Premiums for non-obligatory insurances do not fall under basic living expenses.
• Unavoidable professional expenses: Examples include higher nutritional requirements for night workers, dining out, higher-than-average clothing requirements, and commuting to your workplace. In most cases, fixed amounts are used for these cost calculations (5.50 francs per day for additional dining during night shifts, for example).
• Legally-binding maintenance payments: If you have to pay maintenance for a child or other person who does not live with you, these payments are also included in your basic living expenses.
• Schooling: Extraordinary costs for your children’s schooling is counted as a basic living expense. Examples of extraordinary schooling expenses include the cost of public transportation for your child’s commute to school, and the cost of school materials. Education costs still count towards basic living expenses after your child comes of age, but only until they obtain their first apprenticeship, matric, or other final school diploma.
• Rentals of necessary items: If you have to rent indispensable items such as clothing or furniture, the rents you pay may qualify as basic living expenses.
• Taxes: The withholding tax rate is used for debt capacity calculations, instead of effective taxes as per your tax return. You can calculate how much withholding tax you would pay based on your income using online tools provided by cantonal tax authorities.
• Other debts: If you already have other loans (including leasing), or if you have other debts, all of these financial obligations need to be account for in your monthly expenses.
• Healthcare expenses: These include your mandatory health insurance deductible and copayments, premiums for supplemental health insurance, dentists and dental hygiene, as well as glasses and contact lenses. The law does not explicitly include healthcare expenses in basic living costs. But a common interpretation is that healthcare spending must be accounted for in debt capacity checks because health-related costs cannot be avoided over long terms.
• Other expenses: Differences between the costs which lenders and Swiss debt consultation offices account for in debt capacity checks can be major. But as a basic rule, all expenses which you cannot avoid have to be included in debt capacity calculations. Unavoidable costs may include car-related expenses or costs related to moving homes.

Basic living expenses are then compared to your total income, and particularly these sources of income:

• Salaries: If you are employed, your monthly net salaries count towards your income. If, for example, you receive a thirteenth monthly salary each year or get a bonus, this can be factored into your monthly income. However, the payment of this supplementary money must be assured.
• Alimony: If a former spouse is legally required to pay you alimony, these payments count towards your income.
• Pensions: Private or occupational pensions count towards your income for debt capacity calculations. But social security pensions from the OASI or DI are not seizable.
• Scholarships: If you receive a scholarship – towards an initial or continuing education, for example – it counts towards your income for debt capacity checks.
• Premium reductions: If you receive subsidies towards the cost of mandatory health insurance and these are not already accounted for in your basic living expenses, the premium reductions count as income.

The guidelines used in the cantons of Aargau, Bern, Schwyz, St. Gallen, and Zurich differ slightly from those listed above. 

Here is a concrete example of an employed, single adult without children living in Zurich city:

The person in this example has a discretionary income of 1348 francs per month. So in order to avoid over-indebtedness, your monthly loan repayment cannot exceed that amount.

If the person were to get a cash loan with a 36-month term and a 10-percent annual interest rate, the highest amount they could borrow would be 42,040 francs. You can use the loan calculator on moneyland.ch to find out how much you could borrow based on the annual interest rate, loan term, and monthly loan repayment.

Is debt capacity always calculated in the same way?

No. There are certain key points which lenders have to inquire about. But they also have a certain amount of room to decide which items should and should not be included in their budget calculations. In some cases, flat, fixed amounts are used even when the effective costs are higher or lower.

Lenders often implement debt capacity criteria less strictly in order to offer borrowers higher loans. Many Swiss debt consultants believe that this increases the risk of borrowers becoming over-indebted.

The reason for the lack of uniformity is that the Swiss consumer credit law does not itself specify any clear guidelines for basic living expenses calculations in debt capacity checks. That is problematic because when unpaid debt results in income attachments and/or asset seizures, the process focuses on satisfying the demands of creditors by making the highest possible portion of your income seizable (and therefore leaving the smallest possible amount for basic living expenses). But low living expense allocations are not in your best interest as a borrower. So it is in your best interest to protect yourself by using income and expense estimates which are even more conservative than those used when income is seized to repay debts

Is there income which cannot be seized?

Yes. Certain kinds of income also cannot be attached to repay debt. This is true even if these incomes surpass your basic living expense threshold. Unseizable incomes include OASI pensions, DI pensions, supplemental OASI and DI benefits, and welfare benefits. You can find more details in the guide to seizable and unseizable assets in debt collection. Only seizable income is important for determining your debt capacity.

How does my personal wealth affect my ability to get loans?

The amount of wealth you hold does not play a role in obtaining cash loans. Loans are provided or withheld based on whether you can repay them with your seizable income. That makes sense, because if you would be able to pay off a loan using your personal wealth – by selling your car, for example – you probably do not need the loan in the first place. You could simply sell your car to get the money you need.

Do I have to calculate my own debt capacity myself?

No, but doing so is highly recommended. When you calculate your discretionary income yourself, you can choose a conservative basic living expense threshold and also account for costs which lenders are not required to consider. Knowing the details about your own expenses also makes it possible to alert the lender to points which they did not inquire about in their debt capacity check.

At the very least, you should go over the lender’s budget form with a critical eye and check whether their expense estimates are realistic, and whether additional costs may apply. For example, if you have expensive supplementary health insurance and the premiums you pay are not accounted for in the debt capacity check, you should either account for that expense or terminate the insurance.

Unfortunately, in practice, the debt capacity checks done by Swiss lenders do not provide as much protection for borrowers as lawmakers hoped they would. That is why knowing your own debt capacity is important, as that knowledge enables you to protect yourself from over-indebtedness.

Are debt capacity and creditworthiness the same thing?

No. Debt capacity, as described in this guide, shows a person’s ability to meet their monthly loan repayments using their own income. Creditworthiness, on the other hand, reveals a borrower’s reliability with regards to making payments on time: How likely are they to repay a loan? Creditworthiness checks account for things like a person’s past payment behavior and demographic factors like age and nationality.

Together, debt capacity and creditworthiness make up a person’s overall credit rating.

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