HSBC wants borrowers to stay faithful

If you have money owing on a personal loan, you may be keen to pay it off early to get out of the red.

But last week, HSBC burst on to the market with a new proposition encouraging borrowers to do just the opposite. The deal promises to "reward" customers who stay put for the full term of their personal loan with cashback - amounting to a quarter of the total interest paid.

This "repayment reward" is available to anyone taking out a new personal loan with HSBC between 1 July and 30 September, regardless of how much is borrowed or the loan term.

For example, someone borrowing £10,000 over 36 months at an annual percentage rate (APR) of 6.9 would receive a refund of £266.82. This would in effect reduce the overall interest charged to 5.3 per cent.

HSBC says its offer will reward loyal customers by "reducing the overall cost of borrowing".

Samantha Owens from financial analyst Moneyfacts says this is the first deal of its kind, and a clear move by the bank to try to retain customers. It is also, she adds, in some part due to the abolition last year of the Rule of 78, by which often hefty charges were levied on customers who cleared their debts before the end of the original term.

"Since then, providers have been able to charge only a maximum of two months' interest," she says.

While she welcomes any move to "give something back" to the customer, Ms Owens urges borrowers to shop around for a good rate.

"You have to weigh up whether the end-of-term rebate [on the HSBC deal] is a benefit worth having, as you are only getting back 25 per cent of the interest paid - not 25 per cent of the entire loan."

This is a view shared by Nick White from uSwitch. com, the price-comparison service, who points out: "Given that findings show seven in 10 borrowers repay their loan early, this incentive is immaterial."

A customer who took out this loan and then repaid it early, would, explains Mr White, not only lose out on the cashback but be hit with 59 days' interest. The only way to avoid this is to carry on paying the relatively high rate of 6.9 per cent until the end of the loan period.

Mr White urges consumers to consider an alternative product offering a lower standard rate and lower early-settlement fees, which won't leave them locked into a deal.

At present, there are 15 loans with interest below 6 per cent, including those from MoneyBack Bank and Direct Line, which are topping the tables with an APR of 5.6, and GE Money and Northern Rock (5.7 APR).