These are products which can seriously damage your financial wealth. In some cases, the products can be OK if used carefully. But, often the principle seems to be merely taking advantage of the unwary consumer. Some of these products are blatantly bad value; but, others have their charges cleverly hidden. Make sure you don’t get caught up in products such as these.
10 Financial Products to Avoid
1. Credit Cards with High Interest
If you pay your balance off every month, credit cards can be beneficial and helpful. However, if you start accumulating debt, the interest payments can become a real burden making it difficult to ever pay off the original debt. Typical APR interest rates can be 15-26%. Which means on a balance of £1,000 you will be paying over £160- £260 interest. The interest burden is magnified because you will start paying interest on the interest charges. Many credit cards make it easy to only pay a small monthly payment. But, in paying only a minimum the debt burden can easily escalate. The other feature of a credit card is that it is easy to buy impulsively, without thinking about your budget. If you are frequently tempted to splash out on plastic and worry about it later, consider tearing them up and just spending the cash in your pocket.
2. Pay Day Loans
Who would want to take a loan with an annual interest payment of 2,317%? Pay Day Loans work by making short term loans of a few days, at a certain fixed cost. However, this often disguises the fact that it is basically a loan with an excessively high interest rate. If you make a habit of paying interest rates of over 2,000% it only increases the likelyhood that you will need more loans in the future. Because people spend a high % of their income on getting a short term loan, there budget is stretched making it more likely that you will need to keep borrowing. A pay day loan may be better than defaulting on another loan repayment, or borrowing from a loan shark. But, they should be seen as a last resort with the cost fully appreciated by the potential borrower.
3. Loan payment Insurance
In the UK and US, investigations found that banks have been guilty of misselling insurance for loans (PPI). Basically, you pay a monthly premium to protect your loan repayments in case of illness. Often this kind of insurance works out very expensive; the insurance can cost up to 50% of the loan. (It makes the interest rate on the loan look extortionate) Furthermore it was revealed that banks kept upto 80% of the money paid in. In practise the banks are very reluctant to pay out and they find many reasons why you are not actually eligible. Many people who took out the extra insurance were also not aware that the loan does not require insurance to be taken out; many borrowers were under the impression that the insurance was essential for the loan. There are some things we do need to insure, but there are also times when we need to avoid taking out insurance schemes that are both very expensive and unnecessary.
4. The Balloon Mortgage
Never has one financial product done so much to undermine an economy. A balloon mortgage is a term to describe a mortgage product with an attractive 1 year interest rate, which then shoots up to a much higher interest rate after the first year. Introductory deals are not intrinsically bad, but, the problem with these kind of mortgages was that many homeowners were unaware of the true cost of the mortgage payments after the introductory period ended. One would assume that the subprime crisis would have made these kind of products very rare, but this experience shows the problem of trusting mortgage companies to regulate themselves. Read all the small print and if you have a relative that is not financially illiterate offer to help advise before they commit to products like this.
5. The World’s Worst Credit Card
Every now and then, financial companies seem to bring out products which seem designed for the person who has either money to burn or is completely financially illiterate. Make sure you never get taken in for a product like the Visa ‘Aspire’ card (presumably aspiring to take as much money of the consumer as possible) Some of the many ‘Features’ of this card:
- Annual fees. $150 a year
- Monthly fee – $6.50 monthly (yes, this is in addition to the annual fee!)
- Application fee. $29 just to open the account!
- Minimum APR of 19.50%
- Initial credit limit – $300 (after opening fees annual, fees and monthly fees, you might just be able to buy yourself a calculator so you can calculate how much money will be going to the credit card company)
6. Renting Electric Goods rather than buying
It may be tempting to rent a widescreen TV at a monthly price you can afford. But, within a few months the cost will be similar to buying it outright. However, with renting you are left with nothing – only the prospect of never ending monthly payments. If you can be patient and save the money for a few months, you will give yourself a chance to buy it outright. If you are desperate to have a widescreen TV, it would make more sense to buy it on a standard loan than rent. However, it is better to try and save to avoid paying any interest.
7. Standard Lenders Mortgage
Many homeowners pay too much on their mortgage repayments simply because they don’t take the trouble to remortgage and get a more competitive rate. Financial companies simply take advantage of consumer inertia. This means that they charge higher prices to their loyal customers; but, to new customers they offer the most attractive deal and rates. Therefore, to get a better deal on your mortgage it only requires a quick phone call to your company to ask for a better deal. If they fear that you may move to another company, they will invariably offer you a better deal. With my own mortgage, ringing Standard Life, saved nearly £100 ($200) a month in lower interest payments. This principle also applies to other financial products such as, insurance and even bank accounts. Tip, every year have a quick check to see whether you can move to more competitive deals.
8. The Product That is Too Good To Be True.
This covers all the financial products which at first glance appear to offer an amazing deal. Always be suspicious of a financial product that claims to solve your financial worries and problems. Usually, if extravagant claims are made, there will be some kind of catch. Financial firms are not charities; if they give you a good deal to start off, they will need to find a way to get their money back. Never buy under pressure from a salesman, always take time to think about a product before jumping in. If uncertain take advice from a friend who has some knowledge of financial products.
9. Store Card
Store Cards are like Credit cards except worse. Rather than charging 17%, charge cards can charge upto 30%, just for the privilege of your ‘loyalty’ to your favourite shop. They can be fine if you always pay off the balance, but, once you start paying 30% interest on your debt, it will be very difficult to get it all reduced.
10. Interest Only Mortgage
A sure way to end up paying unending amounts of interest without ever coming close to paying of your mortgage debt. If you get an interest only mortgage, you might as well rent and avoid the risk of falling house prices. Use an interest only mortgage solely to help in times of extreme cashflow where the alternative is putting your mortgage at risk.