Interest Switzerland
The world of finance is characterized by numerous terms and concepts, one of which stands out in particular: interest. In Switzerland in particular, interest plays a decisive role. Whether we are talking about ordinary bank accounts, savings accounts, or loans, interest rates are everywhere in the world of finance and are therefore of crucial importance.
But why does interest exist at all, how does interest work, how does it develop, and what should savers and borrowers pay particular attention to? You can find out all this in this article.
Why does interest exist at all?
The existence of interest is closely linked to the fundamental principle of the time value of money. Money today has a higher value than the same amount in the future. Interest is therefore calculated as compensation for this time value. For example, when you lend money, you give up the opportunity to use it elsewhere. The interest you receive for this period is the compensation for this lost opportunity.
Another reason for the existence of interest is entrepreneurial activity and the possibility of investment. To make investments, it is necessary to forego otherwise possible consumption for a certain time. The interest rate serves as an incentive or reward for the willingness to invest financial resources and thus stimulate the economy.
How interest works
When you apply for a loan in Switzerland, there are different types of interest, including fixed interest, variable interest, and many more. The interest of all kinds works in return for the temporary provision of capital, which is why it is often referred to as the “price of money”. While the interest rate indicates the interest in percent that accrues on lent capital, investments such as savings deposits, call money or bonds offer income or returns in the form of interest.
Economists have been studying the cause and justification of interest rates in detail since the emergence of the monetary economy, and various interest rate theories exist. One fundamental work was written by Eugen von Böhm-Bawerk, among others. In his view, interest rates can be explained by three factors:
- The expectation of rising income in the future is made possible by saving and the realization of interest.
- The higher valuation of current consumption compared to future consumption. Interest is offered as compensation in order to motivate people to forego consumption today by saving.
- The fair participation of investors in the expected increase in productivity resulting from the provision of capital for investments.
Last but not least, interest also fulfills the function of compensating for risks taken. If risks exist, this is reflected in a higher interest rate. A general rule states that the higher the risk, the higher the interest rate. This principle is particularly evident in mortgage interest rates, where people classified as “good” borrowers often receive lower interest rates from banks and insurance companies.
As the lender Miro Kredit AG, we also set loan interest rates. These interest rates can be influenced by various factors, including the creditworthiness of the borrower, the economic situation, and general interest rate policy.
This is the compound interest effect
One particularly interesting aspect of interest is the so-called compound interest effect. This accelerates the growth of a sum of money over time. The interest you earn is added to your capital, with future interest in turn based on this increased capital. This results in your money growing faster than it would with simple interest.
For example, if you invest CHF 1,000 in a savings account at the bank and leave it there for 20 years, the bank will pay you a notional annual interest rate of 5 percent. Without any further deposits, you would have CHF 2,653.30 after 20 years.
With compound interest, however, the calculation would look slightly different: Suppose you invest CHF 1,000 in an ETF with a hypothetical annual return of 9 percent. After the first year, your investment would grow to CHF 1,090. While a gain of CHF 90 in the first year may not seem like much, time in the market can grow your investment significantly. After 30 years, your investment would grow to CHF 13,267.68, an increase of CHF 12,267.68 over your original investment of CHF 1,000.
Compound interest therefore plays a decisive role in the increase of capital over time.
What is the key interest rate in Switzerland?
The key interest rate in Switzerland, also known as the National Bank rate, is a key indicator of the monetary policy of the Swiss National Bank (SNB). The SNB sets this interest rate and influences the interest rate landscape throughout the country.
Since the last update on June 23, 2023, the key interest rate in Switzerland has stood at 1.75 percent. However, the exact level of the key interest rate can always change, as the central bank reacts to economic developments and adjusts the key interest rate accordingly.
How inflation affects the interest rate level
Inflation is the increase in the general price level for goods and services. Inflation plays a decisive role in determining the level of interest rates in Switzerland. When inflation is high, money loses purchasing power, as the same amount of money can buy fewer goods and services.
The Swiss National Bank pursues the goal of stable price development, which means that it keeps an eye on inflation and, if necessary, influences it through monetary policy measures. If inflation rises, the SNB can increase the key interest rate in order to slow down the rising price level and stabilize the purchasing power of the Swiss franc.
These changes ultimately influence consumers’ preferences, so that when interest rates are particularly high, they tend to choose shorter terms for renovation loans or other loans in order to benefit from lower financing costs for short-term mortgages.
Interest and interest rate for loans and savings accounts
When it comes to savings and loans, the interest rate is an important topic that is always followed with great interest. This is because the interest rate is the best way to compare the various offers. This is especially true for loans, as the interest rate provides information on the capital costs incurred by the borrower.
A loan makes it possible to access capital at the time of application that would otherwise only be available in the future. The interest rate can also be seen as a form of compensation, as the money is not available to creditors such as banks and credit institutions. It also compensates for the risk of a loan default.
How high the interest rate is depends on several factors. A basic distinction must be made between the borrowing rate (nominal interest rate) and the effective interest rate. The borrowing rate corresponds to the actual price of the money borrowed. It is calculated based on various reference interest rates such as EURIBOR and LIBOR. However, market conditions also play a significant role in the interest rate.
The effective interest rate on the loan is much more important for customers. In addition to the interest rate, all cost-relevant factors for the loan are included here. This includes, for example, processing and arrangement fees, installment amount, loan amount, and term. Both the borrowing rate and the effective interest rate must always be shown in loan offers.
The interest rate is also of interest to savers, as it indicates how much the money increases with an investment. However, instead of an effective interest rate as with a loan, the term yield is more often used here. The return increases when the interest is added to the credit balance and from then on also earns interest (compound interest effect).
Savers must pay attention to this
It is important to keep a close eye on the interest rate, not only when taking out a loan, but also when saving. The interest rate directly influences how quickly the invested capital grows. However, savers should not only pay attention to the nominal interest rate but above all to the effective interest rate. This takes into account all relevant factors such as fees and terms.
Another point that savers should keep in mind is the compound interest effect. This can have a significant impact on how much assets grow over time. With a clear understanding of these aspects, savers can make informed decisions about their financial future.
What interest rate is relevant when taking out a loan?
When taking out a loan, it is crucial to identify the right interest rate in order to fully understand the financial implications of the loan. Two main terms play a key role here: the nominal interest rate and the effective interest rate.
The nominal interest rate, also known as the borrowing rate, indicates how high the pure interest costs are for the borrowed capital. It forms the basis for calculating the interest that the borrower must pay during the term of the loan. However, this interest rate does not refer to the total costs that may be associated with the loan, but only to the interest-only portion.
The effective interest rate is more decisive for the borrower. This not only includes the nominal interest rate but also takes into account all costs and fees associated with the loan. These include, for example, processing fees, brokerage fees, and other expenses incurred by the borrower. The effective interest rate therefore provides a comprehensive overview of the actual costs of the loan and enables a direct comparison between different loan offers.
It is therefore very important for borrowers to consider both interest rates when taking out a loan. A low nominal interest rate alone says little about the total cost of the loan. In order to make an informed decision and avoid unpleasant surprises, you as a borrower should therefore always look at the effective interest rate. This is the only way you can clearly see the overall picture of your financial obligations and plan your borrowing optimally.
At Miro Kredit, we offer you the opportunity to plan your desired loan with the Miro loan calculator. This is non-binding and free of charge and gives you information about how much your loan will cost. You have the option of adjusting the loan term and your desired amount to your financial possibilities until the loan meets your expectations.
Difference: Nominal interest rate and effective interest rate
As already mentioned, the difference between the nominal interest rate and the effective interest rate is crucial for a comprehensive assessment of the costs of a loan. The nominal interest rate, also known as the borrowing rate, indicates the pure percentage at which interest is charged on the borrowed capital. This interest rate forms the basis for calculating interest payments and is often the first thing borrowers consider when looking at loan offers.
In contrast, the effective interest rate takes into account all other cost-relevant factors. In addition to the nominal interest rate, all fees and expenses associated with the loan are also included here. These include processing fees, brokerage fees, and other potential costs. The effective interest rate therefore provides a comprehensive overview of the borrower’s actual financial obligations and enables you to make a transparent comparison between different loan offers.
However, you should bear in mind that the nominal interest rate alone does not provide the full picture of the cost of a loan. The effective interest rate, on the other hand, provides a realistic assessment and should therefore always serve as a reference point when it comes to understanding the true financial impact of borrowing. Careful consideration of both interest rates is therefore essential in order to make a rational financial decision and avoid unpleasant surprises such as excessive borrowing and interest costs.
What are the current interest rates on loans in Switzerland?
Loan interest rates can vary greatly depending on the lender, the type of loan, the applicant’s creditworthiness, and other economic factors. We at Miro Kredit AG offer you particularly favorable loans with interest rates between 4.5 and 11.95 percent.
The better your credit rating and the more collateral you have as a borrower, the more favorable interest rates you can get on your loan. However, the interest rate can depend not only on your credit rating but also on the amount of the loan and the term. Therefore, to calculate the total cost of a loan, you should take the effective annual interest rate into account. Our loan calculator is available to you free of charge and without obligation.
FAQ
Conclusion
The interest rate trend is of crucial importance for both savers and borrowers. Given persistent inflation, the current interest rate increase is unavoidable. However, this does not mean that consumers cannot obtain favorable loans at attractive conditions. We at Miro Kredit AG ensure that we can provide you with particularly favorable loans despite the current interest rate trend.
Whether you want to buy a new car, need to carry out a renovation, or need capital for important investments - you can apply for your personal loan with us transparently, easily, and quickly!
Private loan calculation example:
Loan amount: CHF 10,000 without insurance. Repayment period: 12 months
Interest (including costs) amounts between CHF 240.50 and CHF 574.25. Effective interest rate 4.5% – 11.95%. Possible loan repayment period from 12 to 120 months
Processing fees: CHF 0.-. Granting a loan is prohibited if it leads to over-indebtedness (§ 3 Unfair Competition Law – UWG)