Personal Loans: 8 Common Mistakes

If handled well, personal loans can liberate you financially by enabling you to pay for things which you could not otherwise afford, and then repay the borrowed capital over time. However, many people waste a lot of money and nerves by using loans the wrong way.

Here, moneyland.ch lists common mistakes that borrowers should avoid.

1. Putting off repayment: The Swiss consumer credit law allows you to repay your debt as promptly as you choose to and lenders cannot force you to stick to a repayment schedule or penalize you for paying off your debt early. So it is in your best interest to repay the loan as quickly as possible because you are paying interest on the amount you actually owe over a given length of time. Don’t follow the lender’s repayment schedule if you can pay off the debt sooner – it will only cost you more money.

2. Borrowing too much: You may be tempted to borrow more money than you need to in order to avoid touching your savings, but never get a larger loan than you actually need. Remember, loans are expensive, and the more you borrow, the more you have to pay in interest. if you can cover part of the financial need out of your own pocket rather than with borrowed money, doing so will save you money in the long run.

3. Not comparing offers: While getting a loan from your bank may seem like the easiest way to go, comparing loan offers from all lenders to find the best deal (with the moneyland.ch loan comparison tool, for example) can help you avoid paying hundreds of francs for no added value.

4. Not refinancing: There is nothing worse for a borrower than hanging onto a bad deal. If you find a lender which is offering a much lower interest rate than what you are paying on your current loan, consider refinancing your expensive loan with the cheaper one. You can find out more in the moneyland.ch guide to refinancing.

5. Sticking to conventional loans: If you limit your search for loans to conventional bank branches then you may end up paying much more for your loan than necessary. Online loan providers now offer some of the lowest interest rates available in Switzerland, and it is important to include these in any comparison. Make sure to stick with well-known Swiss online lenders like those included in the moneyland.ch personal loans comparison.

6. Getting credit card loans: Applying for a personal loan can be an awkward experience and also requires patience. By contrast, using a credit card to get a cash advance or to buy something on credit is easy, instant, anonymous and often feels “cooler” than getting a loan. However, credit cards in Switzerland charge up to double the interest that you pay for a personal loan (find credit card interest rates in the credit card comparison). While they can be handy tools for getting small loans quickly, using a personal loan for larger amounts is a cheaper option.

7. Falling for swindlers: The internet is crawling with loan scams. Beware of too-good-to-believe offers and never transfer money to an online lender – serious lenders do not ask for deposits or interest prepayments ahead of providing loans. Even genuine loan offers from official foreign lenders should be handled with care because those lenders may not comply with Swiss consumer protection laws.

8. Not looking at alternatives

From a financial perspective, the best alternative is to save up and budget for purchases instead of using loans. Having an emergency fund can help you avoid having to get loans to cover unexpected expenses.

If there is no way around getting a loan, check whether family members or close friends are willing to give you an interest-free loan. If you have a life insurance policy with cash value, then using policy loans is a cheaper alternative to expensive personal loans or credit card loans. Note: Cash-value life insurance is generally not an optimal savings and insurance solution. Lombard loans can be a cheap alternative to personal loans if you hold a lot of securities or other assets and are aware of the risks.

More on this topic:
Swiss personal loan comparison
Refinancing loans in Switzerland: Questions and answers
The costs of Swiss personal loans explained
How to recognize fraudulent loan offers