Default rates are one of the most important indicators in the credit business. Fortunately, they are at a very low level in Switzerland: the market leader for personal loans recorded an NPL ratio of just 0.6% on their consumer loan portfolio last year. Capital lender can also look forward to extremely low figures in its first year of operations.
NPL stands for so-called non-performing loans – in other words for loans in which the debtor falls behind with the payment of the debt, thus defaulting on the debt and therefore has to be individually adjusted by the creditor. The NPL ratio in turn quantifies the proportion of non-performing loans in relation to the total of outstanding amounts. It is correspondingly positive if the NPL ratio is low.
If you compare the numbers between the USA and Switzerland over the past four years, it shows that Switzerland can trump with continuously low credit default rates. Where an NPL ratio of 0.81% is currently measured in the USA, it has fluctuated between 1 and 2% over the past four years. In Switzerland, the number never exceeded 0.7%.
Continuity of low failure rates and their reasons
The reason for the continuously low default rates is surely the strict consumer credit law prevailing in Switzerland. The maximum interest rate prescribed by law (new at 10%) makes investing in bad debtors unattractive and not worthwhile. This in turn leads to relatively high minimum requirements for the creditworthiness of the borrowers.
In addition, the consumer credit law (KKG) prescribes a detailed credit check, which in turn leads to a high standard in the credit institution’s review processes.
Capital lender failure rates
Capital lender attaches particular importance to the fact that all financing is sensible and sustainable. The platform focuses on the premium segment of borrowers. Only applications with good ratings qualify for funding via Capital lender. The best of the many applications for a personal loan will be selected and will be financed on the Capital lender Platform. In the first year, the credit auditors rejected over 85% of the applications, keeping the quality of the investments high.
Corporate bonds vs. Investing in loan projects – who wins?
To date, the failure rate at Capital lender has been 0% – although this number cannot, of course, be expected in the medium to long term. Models created by Capital lender have a historical default rate of 0.52% to 0.77% for loans with score A. For Score B, in turn, 0.79% to 1.18% were calculated.
If you add the average yield of 6.19%, you get a good overall picture. If one assumes a carefully estimated average default rate of 1% to 1.15% (as mentioned above, the market leader had an NPL ratio of 0.6% to 0.7% in recent years), then the investment in credit projects is worthwhile compared to Corporate bonds with a BBB to BB rating anyway – these yield a return of 1% to 2%.