25 August 2006
First Direct's announcement of 25% cashback offered on unsecured personal loans for existing customers has been greeted with a dose of realism by uSwitch.
Comparable to it parent company HSBC's cashback offer, this incentive would only be paid out when the loan reached the end of the set time period.
This means that if a customer wanted to pay back a ten-year loan early, there would be no cashback.
Nick White, head of personal finance at uSwitch, stated: "It appears to be a good deal but the cashback returned at the end of the loan can potentially reduce the typical APR of 6.9% to a best buy rate of 5.3% APR.
"In monetary terms, on a £10,000 loan taken out over five years, the borrower could expect to get just £267.86 cashback at the end of the term, that's just £4.46 per month."
Mr White added that this allurement could inconsequential: "For many people this 'incentive' is irrelevant. Given that a typical borrower is more likely to repay their loan early than to see out the full term of the loan, many will never actually receive the cashback as it's only paid if the loan runs full term.
"Furthermore, customers who choose to take out this loan and repay it early would not only lose out on the 'cashback', but they would also be hit with 59 days' interest. This could cost them a further £30.882 on a loan of £10,000 over 36 months if they paid the loan off in full after 24 months."
uSwitch urges customers to consider whether realistically they will see out the entire length of a loan before accepting a cashback offer.