Post Office loan isn't pushing the envelope

Abbey's latest advertising campaign encourages us to take one out to pay for a new nose or liposuction. Or for the less vain, a holiday or a new car, perhaps, or those long-overdue home improvements.

Unsecured personal loans continue to be in demand: more than six million were taken out last year, and last week saw new offers from Mint, Royal Bank of Scotland's financial services brand, and the Post Office.

The latter's arrival in the ferociously competitive UK financial services market was much heralded but ended up disappointing many who had hoped it would shake up the market rather than keeping pace with high street rivals.

The Post Office loan's annual percentage rate is 12.5 on £3,000, 8.9 on £5,000 and 7.9 on anything above £7,500.

While that 8.9 per cent rate does beat Barclays' 9.9 per cent and Nat West's 10.9 per cent on the same loans, it is simply on a par with Lloyds TSB and Royal Bank of Scotland.

However, a quick glance at our best-buy tables shows that the Post Office rate is 2.7 percentage points higher than the top-scoring Northern Rock loan for £5,000 (6.2 per cent) and 2.2 percentage points higher than the rate at Nationwide (6.7 per cent).

Mint's own debut in the personal loan market, at 6.5 per cent, also trounces the Post Office.

"Although Post Office loans offer relatively better rates than on the high street, they are by no means competitive compared across the whole loans market," says Richard Mason, the director of personal loans at Moneysupermarket.com.

Michael Senior, the head of personal lending at the independent financial adviser The MarketPlace at Bradford & Bingley, says the Post Office rates are "very uncompetitive" if you borrow £4,000 or less.

In its defence, the Post Office says its rates depend entirely on the amount borrowed rather than on an individual applicant's credit rating.

When taking out any personal loan, avoid those that penalise you for early repayment. Watch out, too, for unnecessary protection. Many banks will try to encourage you to insure your loan in case you are unable to pay it back because of injury or unemployment. But if you already have income protection, disposable savings or a decent sick-pay scheme at work, you could end up wasting hundreds of pounds over the life of a loan.