Plans to scrap rules which enable lenders to penalise customers who pay back loans early were announced by the Government today.

It would allow consumers to move a loan to another provider - to take advantage of a more competitive rate or pay it off early - without having to face excessive charges.

About 70 per cent of all personal loans are settled early but under current rules people have to pay a penalty to do so, calculated using the so-called Rule of 78 formula, which tends to favour the lender.

The Department of Trade and Industry plans to replace this formula with one which is fairer to consumers, saving them an average of £50, although it said on higher value loans the savings could be thousands of pounds.

For example, if a consumer had a £10,000 loan which was being repaid over 15 years but they decided to pay it off after only 72 months, the penalty would have been £1,344 higher under the Rule of 78 than it would be under the new method.

The reform will also aim to make consumers more aware of the charges they face if they end a loan early before they take it out.

However, lenders will also be able to charge consumers the equivalent of one month's interest to cover the administration costs of ending a loan early.

Consumer affairs minister Gerry Sutcliffe said: "Today's changes will be fair to both lenders and borrowers."