At Yourasset, customers often ask us why interest rates for watch financing are higher than those for leasing or home mortgages.
Here, we break down the five variables that determine the cost of interest for a regulated loan.
The Variables
- Risk-free rate. It is typically the interest rate of a government bond with a duration similar to that of the requested watch financing. For example, a term of 48 months (four years). Currently, a government bond in Swiss francs carries an interest rate of around 0%.
- Refinancing rate & margin. This is the cost that banks pay to borrow money from investors in order to lend it to their customers. For most banks in Switzerland, the rate is between 1 and 2%, which is higher than that of Swiss government bonds. Plus, there's the margin that a bank must earn on average, which is the net revenue from its lending business. This margin is influenced by a bank's business policies and competitive environment among banks.
- Customer credit risk. This variable has the greatest impact on the interest rate. Each bank individually assesses the credit risk or credit profile of every customer. Many components are reviewed, such as income and expenses, as well as personal information, such as age, marital status, number of dependents, nationality, residency status, and whether the customer has existing loans or leases, a clean debt collection record, and good credit reports.
- Additional securities. Interest rates are lower when the bank has additional security, such as a legal title to a car or house. An insurance is also a benefit. If the customer defaults on the loan, the bank can sell the asset to recover some or all of the outstanding balance. This reduces the rate of the upcoming Collectors Leasing on luxury assets too.
- Earnings potential. The bank calculates the total earnings potential of a loan. Even with a high interest rate, the bank earns less from a lower financing amount — let's say, below CHF 10,000. Therefore, interest rates on home mortgages are much lower than those on consumer loans and leases because the financing amounts are higher, leading to higher total earnings in Swiss francs. A mortgage is also secured by variable 4, which reduces risk. Interest rates tend to be lower for higher financing amounts, as long as the financing amount doesn't increase the customer's credit risk profile too much.
How to Reduce Your Interest Costs
This overview shows that interest costs for consumer financing are primarily driven by variables 3 and 4. Customers can actively influence variable 3 by paying their monthly financing rate on time, which builds a positive credit profile.
Flexibility benefits customers but is a cost to banks. With regulated consumer financing, customers can repay the loan early at any time without incurring the interest penalties often charged for early repayment of a home mortgage.
The Tax Advantage of Watch Financing in Switzerland
It is also important to note that interest costs for regulated consumer financing (such as watch financing) are tax deductible. This means that a customer in Switzerland can reduce their interest costs by their marginal tax rate, which can be up to 35%. For example, an interest rate of 9% would be reduced to 6%, reflecting the benefit of the tax deduction.
Related Reads: 0% Financing and Leasing Comparisons
In a separate article, we wrote about the cost of 0% financing. Read it here. Although it may seem inexpensive at first, the costs are actually higher than those of a regulated loan because the bank has much less information about the customer, which significantly increases the risk.
We also wrote a Blog article comparing a 4.9% leasing rate with an 8.9% financing rate, and that the effective interest costs are very similar. Read it here.
Finance Your Next Luxury Watch with Yourasset
With the Yourasset financing option, customers can pay for their next watch in up to 60 months via a transparent and regulated approach. Whether you're eyeing the Rolex Day-Date or another iconic model, our solutions are built to support your passion, with no compromise.