Post Office joins the queue

The Post Office entered the financial services market this week with the launch of an unsecured personal loan which, while living up its marketing blurb of being straightforward and easy to understand with no hidden catches, is unlikely to set the consumer world on fire.

Customers can borrow from £1,000 to £25,000 at fixed rates of interest based solely on the size of the loan and not on the credit rating of the applicant.

Chief executive David Mills says: "Many people may be lured in to taking out a loan with a provider that seems to be offering an attractive, low APR. However, many people never get offered these rates. Depending on an individual's credit scoring, they will be presented with anything up to an additional 20%, more than double the cost of borrowing the same loan."

The Post Office says what you see is what you get: all customers who successfully apply for a loan will get the advertised rates and no others. But while this transparency is welcome, there are other major providers who also base their rates on the amount borrowed, not on individual credit ratings, and several that offer more competitive rates (see table). And if you have a top-notch credit rating, you may get even keener rates from lenders who do use risk-based pricing. These include: Lombard Direct, Liverpool Victoria, Cahoot, Direct Line and Northern Rock.

So don't assume that the Post Office is going to offer you the best deal. On a typical £5,000 loan repaid over three years, for example, you'll pay nearly £184 less if you borrow from Mint which charges the cheapest fixed rate at 6.5% than if you take an equivalent Post Office loan at 8.9%.

A spokesman for Mint confirmed: "We offer a simple, transparent product where, as long as you are accepted for one of our loans, you will get it at the rate you apply for. We do not use risk-based pricing and all out customers pay the advertised rates."

To be fair, the Post Office is not claiming to offer the best rate on the market. "We believe our rates are competitive across the marketplace. Yes, there will be some cheaper option out there, but we intend to offer a competitive, easy to use and understand product, with no hidden charges," said a spokesperson.

It has arguably met that aim when it comes to loans in the £5,000 upwards bracket. The average monthly repayment for an unsecured personal loan of £5,000 over 3 years is £157.16 without insurance, according to Moneyfacts, compared with £157.95 on a Post Office loan.

But its rates charged on smaller loans - 14.9% on £1,000-£3,999 and 12.5% on £4,000 - are hardly "competitive". Michael Senior, head of personal lending for the UK's largest IFA, The MarketPlace at Bradford & Bingley, says: "The devil is, as ever, in the detail. For example, the new proposition charges more in interest the smaller the loan size. So, there's an argument that the Post Office is discriminating against those who don't need large loans, and encouraging them to borrow more to receive a more competitive rate."