Cashback Loans: Gimme Or Gimmick?

Two leading lenders now offer cashback personal loans, but how do these stack up against the competition?

Last week, Nationwide BS hiked its personal loan interest rates and launched a new cashback deal for borrowers.

Between 2 October and 30 November, customers who take out a personal loan with Nationwide BS and buy its LoanCare payment protection insurance (PPI) will receive cashback of a fifth (20%) of their insurance premium when their loan ends. The lump sum refunded will depend on the loan amount and period: for example, on an insured loan of £5,000 over five years, the cashback would total £122.21.

Of course, as you'd expect, this deal comes with several strings attached which limit its attractiveness!

First, the loan must run its full course, so repaying it early will mean forfeiting the cashback. Given that seven in ten loans (70%) are repaid early, this is no minor concern. Second, the borrower must not make a successful LoanCare claim. Third, if the borrower goes more than one month in arrears, the cashback is lost.

Even worse, Nationwide BS has sneakily pushed through an increase in its loan interest rates in order to help fund its latest offer. For instance, I see that the typical APR for a £5,000 loan has been hiked by more than a percentage point, from 6.7% APR to 7.8% APR, which adds extra interest of £85 to the cost of an unprotected loan of £5,000 over three years. Shame!

However, the biggest problem that I have with the Nationwide BS offer is that it ties the cashback into the purchase of PPI, which provides protection against accident, sickness, unemployment and death. In effect, this cashback is a no-claims discount for PPI policyholders, but who would want to buy cover which is presently being investigated by both the Financial Services Authority and the Office of Fair Trading, as I warned here?

As the UK's largest building society, Nationwide BS is one of my very favourite financial firms -- not least because it has an excellent range of good-value financial products, and offers a fair deal to both new and existing customers. Nevertheless, although it pains me to do this, I'm have to say that its latest loan offer stinks and should be given a wide berth. In future, I hope Nationwide BS goes back to providing its customers with good deals, rather than gimmicks!

The only other lender that I know of which promotes a similar cashback deal is Moneyback Bank, which offers a fixed yearly refund based on the size of the loan. Here's how Moneyback Bank compares to Nationwide BS and another leading lender, Northern Rock (which doesn't offer cashback on PPI):

The cost of a £5,000 loan over three years with PPI

Source: Moneyfacts

As you can see, this clearly proves that cashback is a gimmick, as the cheapest protected loan comes from Northern Rock, which is £214.03 cheaper than Nationwide BS and £208.68 cheaper than Moneyback Bank in the above scenario -- and that's after taking the cashback rewards into account.

Finally, as I explained in Best Buy And Don't Buy Loans, not protecting your loan with PPI will save you a packet. Indeed, PPI typically increases the cost of your loan by 12% to 30%, which is a steep price to pay for piece of mind. However, if you must have this safety net, never buy PPI from a lender. Instead, shop around for a Best Buy stand-alone monthly premium policy from independent providers such as Ant Insurance, Best Insurance, British Insurance, Burgesses, Helpupay and the Post Office. Amazingly, these policies can be a fifth of the price of those sold on the high street!

Finally, read my twelve tips on how to find the perfect personal loan; otherwise, you could end up £1,000 or more out of pocket!

More: Use the Fool to find lovely personal loans, choice credit cards and super savings accounts!