Now M&S wants to lend you more

Today it is roaring back to rude health, its share price doubled in a year and its stores revamped in time to catch the High Street spending boom.

Now M&S has launched the most surprising part of its recovery plan - a campaign urging Middle England to borrow money to enjoy a better lifestyle and have more fun.

M&S has offered personal loans since 1989 but it would like to lend much more if its customers can relax and enjoy the idea.

Director of financial services Mick ONeill says: "It is time for a more balanced perspective on borrowing.

"People can have a better lifestyle sooner if they manage their finances better. It is time to redress the over-scary image. Borrowing is not a bad thing but over-commitment is.

"People have no need to be afraid of borrowing if they realise the attractions when interest rates are low. Borrowers should do their homework and make sure they can afford it."

There is commercial logic to Mr ONeills enthusiasm for credit. Financial services were a jewel in the M&S crown for years but performance since 2000 has been poor, with annual profits down by more than 25 per cent to £84 million.

Yet the companys 5.6 million Chargecard holders, mainly 45-plus and female, are among the wealthiest households in the land, with huge sums stashed in bricks and mortar.

The Borrowing Britain Report from M&S says the average amount borrowed by every adult in the UK, excluding mortgages, is £4,350.

Personal loans average £4,840, bank overdrafts £920.

Those failing to clear credit or store card accounts each month are an average of £1,770 in the red.

The more we earn, says M&S, the more we borrow.

Those earning £40,000-plus have unsecured borrowings averaging £8,080 while those on less than £15,000 are £2,650 in debt.

ONeill says: "When people get into difficulties, it doesnt bring our original decision to lend into question. The problem is usually down to change of circumstances - marriage break-up, death or job loss.

"With responsibility on both sides, a long-term arrangement is put together for people in trouble."

M&Ss plan to promote borrowing has four key planks:

A combined credit and
loyalty card will go on trial in the North-East and South Wales, with shoppers collecting loyalty points to be spent mostly in M&S stores. The credit card can be used anywhere, like Visa or Mastercard.

Personal loans, cheaper for
Chargecard holders and costing 10.9 per cent for sums of £5,000 to £9,999 over three years, could be cheaper still in special offers.

A Personal Reserve offering £3,000 instant credit, which
only attracts interest when it is drawn down.

A car buying plan, with
loans up to £20,000, which increases spending power by deferring up to 60 per cent of the total loan amount until the end of the repayment period.

In all these packages, paperwork is kept to a minimum and a sophisticated credit scoring means some borrowers get less than they originally requested.

M&Ss success in increasing its loan book will not necessarily pump more money into the economy. But it might attract business from other lenders.

Unauthorised overdrafts at the High Street banks are being charged 30 per cent-plus and store card credit is only slightly cheaper: Allders (29.8 per cent), bhs (29 per cent), Debenhams (29.9 per cent) and Selfridges (27.6 per cent).

A careful borrower who searches out comparable rates on the internet or through publications like Moneyfacts before taking the money can slash the cost of credit significantly.

But small loans remain quite expensive measured against the inflation rate.

Even M&S charges 16.9 per cent to non-Chargecard holders needing less than £1,000.

The M&S initiative, however, poses a big question. Is this really a good time to borrow or rather the right moment to batten down the hatches?

Two years of low interest rates have left Britain awash with debt. Last autumn, the Citizens Advice Bureau service claimed its outlets around the country were dealing with new cases of problem debt worth £1.2 billion a year.

Three-quarters of the problem cases were consumer debts - bank loans, credit and store cards, catalogue debts and hire purchase.

Simon Rubinsohn, UK economist of City fund managers Gerrard, said UK households paid a total interest bill of £13 billion in the final quarter of last year and marginally more in the same period this year.

Mr Rubinsohn said: "Consumers have enjoyed a very favourable mix of economic circumstances over the past year - employment at record levels, a feeling jobs are as secure as they can be in a global economy and interest rates at 30-year lows.

"If all that can be sustained, by all means borrow more. It not, pressures will emerge as rates rise. My suspicion is last year marked an unusual period for the UK economy and, if the Bank of England pushes rates up towards six per cent, there could be a dent in household cash flows.

"Many consumers still see a favourable personal balance sheet because the value of their homes is still rising but the early Nineties showed what happens when asset values go into reverse. Building up further debt from here is a high-risk strategy."

David Dooks, of the British Bankers Association, says the M&S move was "a strange stance to take".

He said: "We know the Monetary Policy Committee is concerned about the levels of individual debt but banks are monitoring the position closely and signs suggest people can service higher levels of debt than before.

"Many people can clearly afford to borrow more and most people are comfortable with the level of debt they have taken on. That could change but I am not sure it could change rapidly. We dont know how far rates need to rise before it puts the brakes on consumer debt.

"The rise in National Insurance contributions from next April will also hit personal disposable income. Will it have a severe impact? We are in a position of wait and see."

Not even the experts know for sure where the UK economy goes from here. Before you take that M&S loan, remember the hard lesson of "double dip recession" in 1991/4. Dangerous credit is when borrowers cannot cut their losses and get out.