Cashback spreads to loans – but be wary of the unexpected costs

Marks & Spencer is hoping to tempt consumers with a new cashback reward on its personal loans. Customers who take out a loan before 11 August will be offered a refund of 10 per cent of the interest paid. M&S offers a typical rate of 8.7 per cent on a £10,000 loan over 36 month which, with the cashback, drops to the equivalent of 7.9 per cent.

This may seem like an attractive deal but a closer look exposes several pitfalls. Firstly, the headline rate is typical and guaranteed to be available to only two-thirds of customers accepted. "Other providers who have similar deals at 7.9 per cent include Tesco and Nationwide and Sainsbury's Finance, which offer the rate to Nectar card holders," says Michelle Slade, from financial information service Moneyfacts.co.uk. "All these loans, including the M&S one, are typical rates, so if a customer doesn't have a perfect credit history they may be offered a higher rate."

There are several restrictions. The offer is available only on loans between £7,500 and £20,000 with a minimum repayment period of 36 months. Furthermore, the cashback is given only once the final repayment has been made so M&S can hold on to the customers' money throughout the loan period.

Cashback deals are a common marketing tool but how can consumers identify the good from the bad? With these products, the rates or premiums should always be the deciding factor as any cashback reward tacked on to the deal will rarely cover the cost of increased payments over the lifetime of the policy or loan.

Cash rewards on mobile phone contracts have also caused controversy for their complicated terms and conditions and the resulting difficulty in claiming the cash. "Consumers should never let the cashback tail wag the value dog," warns Jasmine Birtles, personal finance expert from Moneymagpie.com.

However, cashback incentives are useful for products that customers were planning to purchase anyway. First Direct offers to pay £100 to customers who switch to its current account. There is a minimum monthly deposit of £1,500 (or it costs £10 a month to hold the account) but otherwise the account has no nasty surprises and offers an interest-free overdraft of £250.

If used properly, cashback credit cards can save consumers money by rewarding spending. However, anyone unable to repay their credit cards in full each month should steer clear because of the high interest rates charged. But for those that do, cashback cards are a simple way to make some extra money on their normal spending. American Express Platinum Moneyback card pays 5 per cent cashback for three months, up to a maximum of £2,000 (£100 cashback earned). Thereafter, rates are tiered depending on how much is spent but cardholders can still earn up to 1.5 per cent. "Certainly with cashback credit cards, as long you are going to pay them back straightaway, they're brilliant," says Ms Birtles.