How many of us are likely to grab a £5,000 loan when we go to the post office for a book of stamps and a few groceries? The question is about to be answered by the Post Office's decision to dive into the personal loans market.

With Britain knee-deep in credit and lenders forcing rates down to the lowest levels for a generation, some question the Post Off-ice's timing as well as its common sense.

But the Government decision to pay benefits electronically means Post Office branches - losing about £15m a month - need new sources of revenue. With loans so popular at the moment, the Post Office hopes to repeat its success in the foreign currency market.

Customers, who can collect leaflets for personal loans at 16,500 branches, can borrow anything from £1,000 to £25,000 at a rate that depends solely on the loan amount, rather than the credit rating of the applicant.

A £1,000 loan costs 14.9 per cent APR - but the rate reduces to 7.9 per cent APR from £7,500 upwards. To provide the service, the Post Office is linking with the Bank of Ireland, and most customers get a response to an application - either online or by telephone - within ten minutes.

There is no upper age limit for borrowers, who can spread repayments over a maximum seven years. Loans cannot exceed 75 per cent of an applicant's gross annual income.

Glance at the list of unsecured personal loans in MoneyFacts Magazine, and the Post Office deal looks unappealing. Rival lenders quote 6.5 per cent on loans of £5,000 where the Post Office charges 8.9 per cent.

Michael Senior, head of personal lending at the UK's largest financial advisor, The MarketPlace at Bradford and Bingley, highlights the gap with rivals on smaller loans.

"The Post Office launched its new proposition in a blaze of glory," he said. "The devil, as ever, is in the detail.

"For example, it charges more in interest the smaller the loan, so the Post Office is discriminating against those who don't need large loans, and encouraging them to borrow more to get a more competitive rate.

"For loans of £4,000 and below, the rate offered is very uncompetitive compared to market-leading deals available through the likes of Cahoot and Northern Rock. At £3,000, the Post Office's typical APR is 14.9 per cent, against Cahoot at 5.9 per cent. Over three years, the Post Office loan would cost over £400 more in interest.''

Richard Mason, at moneysupermarket.com, said: ''There are 45 loans available online cheaper than the Post Office, and my concern is that Post Office loans have a sting in the tail. Borrowers could pay two months' interest if they repay early."

When the Post Office moved into foreign currency six years ago, there were similar doubts it could compete. Three years after scrapping commission charges, it is the market leader with a 21 per cent market share.

Could Post Office loans strike a chord in a similarly effective way? Its new campaign is based on three arguments.

Firstly, it says its rates are transparent and genuine - what you pay is "what it says on the tin".

Rivals quoting headline-grabbing figures often charge considerably more.

Post Office executive Mike Smith said: "Many people are lured into taking a loan with a provider offering an attractively low APR. After credit scoring, they end up paying between two and ten per cent above that figure.

"According to latest Bank of England figures, the average rate for all personal loans from banks and building societies is 13.22 per cent. That is much higher than headline-grabbing rates in the adverts, and compares with our average rate of 8.9 per cent."

Smith strongly disputes Richard Mason's claim that the Post Office will penalise early repayers. It does use the Rule of 78 calculator - like many other lenders - on early repayments, he says, but will not levy redemption charges.

Secondly, some borrowers will be impressed that the Post Office is not reserving lowest rates for online applicants. Why should more affluent borrowers with easy access to IT be subsidised by other borrowers applying by telephone?

Thirdly, the Post Office claims to offer cheaper loan insurance. While many lenders add the cost of insurance to the original loan at the start, thereby forcing borrowers to pay interest on the insurance charge, the Post Office merely adds the insurance premium to the monthly statement.

Next year, the Post Office hopes to offer motor insurance, credit cards and mortgages - alongside travel insurance, Disney theme park tickets and mobile phone top-ups already available.

With that sort of agenda, it dare not do anything to sully its "value for money" reputation

- John Dresser is an independent retirement planning specialist and director at Hennessey and Partners based in Darlington. He can be contacted on (01325) 488556.

- Nigel Bourke is proprietor of Nigel Bourke and Co, a company regulated by the Financial Services Authority. He can be contacted at ifa@nigelbourke.co.uk or on (01642) 670307.

- Graham Laverick is MD for WR Financial Management in Teesdale, South Stockton. He can be contacted on (01642) 661600.

Published: ??/??/2004