10 rip-off financial products
Whether you're raising a family, looking for a new car or just wishing to grow old disgracefully, chances are you'll need a variety of financial products to help you achieve your goal.
But while some products make it easier to reach your target, others can be unsuitable, expensive or just plain wrong. Here are 10 products you should review.
1. MOBILE PHONE INSURANCE
Most of us would be lost without our mobile phones, but when it comes to insuring them, it's not such a compelling relationship.
Mobile phone insurance can set you back £100 a year and, according to Peter Staddon, head of technical services at the British Insurance Brokers' Association, most of us would be better off hanging on to our money.
"If you lose your mobile phone, chances are you'll kick yourself, but in most cases, it's not a big loss," he says.
"If you couldn't afford to replace your phone, then do consider insuring it – but shop around to get the best deal and look at whether it's better to add it to your home and contents insurance."
SAVING: Up to £100 a year.
USELESSNESS RATING: Only worth having if you can't afford to replace your phone and you're prone to losing things.
2. STORE CARDS
Often sold with the incentive of a discount on your purchase, store cards can quickly rack up enough in interest to wipe out whatever saving you initially made.
"These cards should definitely be avoided," says Andrew Hagger, a spokesperson for moneynet.co.uk. "Interest rates on many of them are close to 30%."
"If you need to buy on credit, get a credit card instead," says Hagger. "The average interest rate is 18.5% for purchases, and there are plenty with much lower rates."
SAVING: Repaying the minimum 4% each month on a £250 purchase on a card with an APR of 29.9% would leave you with a debt of £205.81 at the end of 12 months, with repayments made totalling £109.89 Alternatively, go for an interest-free deal: if you pay £20.80 a month, for example, that would clear the £250 completely after 12 months.
USELESSNESS RATING: If you're disciplined enough to take advantage of the discount deal and then cut up the card before you're charged interest, go for it. Otherwise, use a credit card.
3. PAYMENT PROTECTION INSURANCE
Payment protection insurance (PPI), which promises to cover the repayment on a debt if you lose your job or are unable to work due to illness or accident, appears to be a prudent way to protect yourself from huge debts.
But, unfortunately, the banks' hard sell of PPI meant that thousands of people ended up with a totally worthless product. "They were selling PPI to the self-employed," says Staddon, "Although they would never have been able to claim for unemployment."
However, don't let this put you off all plans. "Some policies are good. Look for those sold through brokers as they can arrange cover that suits your needs," he adds.
Alternatively, consider income protection insurance, which can pay until you retire, and is often more comprehensive.
SAVING: The figures vary but, according to which? PPI could add an additional £2,000 to £3,000 to a £7,500 five-year loan.
USELESSNESS RATING: There are better protection products available.
4. DEBT MANAGEMENT PLANS
Help to get back into the black can be invaluable but, according to Which?, some debt management plans can actually add to your debt.
Moneywise recommends speaking to a debt management charity such as the Consumer Credit Counselling Service (cccs.co.uk), National Debtline (nationaldebtline.co.uk) or Citizens Advice Bureau (citizensadvice.org.uk).
Theses charities won't charge you a penny and will negotiate with your creditors and set up a repayment plan.
SAVING: Potentially thousands of pounds.
USELESSNESS RATING: Why pay for something when you can get it for free?
5. PACKAGED CURRENT ACCOUNTS
It's another of the banks' hard sells, offering the opportunity to make hundreds of pounds of savings in exchange for a monthly premium of anything from £2 to £25.
But while it claims these benefits are worth up to £1,126 a year, they won't suit everyone - and you can generally get them cheaper elsewhere.
SAVING: Up to £300 a year.
USELESSNESS RATING: Great if you use enough of the freebies, but switch to free banking if your packaged account isn't paying for itself.
6. ID THEFT INSURANCE
Having your identity stolen can result in all sorts of problems, from huge credit card bills to ruined credit records. But taking out insurance that promises to sort these problems out for you is probably not worth doing - especially when it costs between £5 and £7 a month.
"If you want to take out this sort of cover, check the policy – some policies will help you reinstate your credit record while others just give you sample letters to send to the companies involved," says Brian Brown, head of research at Defaqto.
He adds that, ultimately, if the ID theft is not your fault, you'll get your money back anyway. This is because, unless you've been negligent, any financial loss suffered as a result of ID fraud is already covered under the Banking Code.
The government's fraud prevention service, CIFAS, offers free advice on ID fraud (go to cifas.org.uk).
Also, you can keep tabs on your credit file through the credit reference agencies Callcredit, Equifax and Experian.
SAVING: Up to £84 a year.
USELESSNESS RATING: Only take this out if the prospect of sorting out the mess causes sleepless nights.
7. PET INSURANCE
Taking out insurance to cover vets' bills for your beloved pooch or moggy may seem a sensible move, especially as the cost of treatment has rocketed in the last few years. However, according to Brown, premiums can shoot up too.
"We took out dog insurance a few years ago at £10.99 a month. This moved to £16.99 and rose to £30.99 a month. That's more than I pay for car insurance," he explains.
Brown switched to a less comprehensive policy to save money and ensure the bills for any really nasty illnesses or accidents were picked up - but you might want to weigh up whether it's worth taking out cover at all.
As an alternative, you could save the money you would have spent on insurance for the occasion when your pet really does need treatment.
SAVING: Up to £300 a year
USELESSNESS RATING: This can be invaluable if your pet needs expensive treatment, but keep a eye on what you're paying as it can turn into little more than a payment plan.
8. SECURED LOANS
Think twice before taking out a secured loan (where the debt is secured against your home) as the risk attached is so great – if you fail to make your repayments, you could end up losing your home.
Where possible, you should only take out an unsecured loan, so your home is not put at risk. However, if that's not an option, you could consider increasing your mortgage.
SAVING: Which? puts the potential cost as losing your home if you fail to keep up repayments.
USELESSNESS RATING: You can get a decent interest rate on a secured loan, but can you afford to put your home on the line?
9. PAYDAY LOANS
Payday or short-term loans let you get your hands on cash if the month has been 'too long' for your salary. But while the fee can seem reasonable, the APRs can be horrendous.
Instead of going for a short-term loan, speak to your bank. An authorised overdraft costs considerably less if you only intend to use it for a few days.
SAVING: £250 from Wonga.com for 10 days costs £30.70. A 10-day overdraft of £250 with Nationwide, which has an APR of 18.9%, costs £1.21, saving you £29.49.
USELESSNESS RATING: Why pay four-figure APRs when an authorised overdraft is so much cheaper?
10. EXTENDED WARRANTIES
If you've just spent hundreds of pounds on a new television, computer or washing machine it can seem sensible to take out an extended warranty to give you protection if something goes wrong.
However, you should weigh up the costs first. Any new goods you buy will have a manufacturer's guarantee that will last for at least 12 months - this renders warranties pointless for the first year after purchase.
In addition to this guarantee, under the 1979 Sale of Goods Act, retailers are liable to pay for any repairs or replacements to items they have sold that have developed faults or don't function properly within a short time of their purchase.
For products that are expected to last longer, traders could be liable to compensate you for up to six months.
However, if you still decide to take out an extended warranty, you can, say, protect your £300 laptop for £7.99 a month once its annual warranty runs out.
But in three years you would have paid almost enough in insurance premiums as it would to take to buy a brand-new laptop.
SAVING: Around a third of the cost of the item each year.
USELESSNESS RATING: Before taking out a policy, ask yourself whether you could afford to replace the product once the guarantee has expired.
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
As the name suggests, secured loans require security, or “collateral”, usually in the form of property, a motor vehicle, or another valuable item, as a guarantee for the loan. This effectively reduces the level of risk to which a lender is exposed, as the lender has a claim against your home, or other effects, if you default. Secured loans are often available at competitive interest rates. Types of secured loans include mortgages, logbook loans and some types of hire purchase where the loan is secured on the goods you’re buying and these are repossessed if you default.
Unsecured loans mean the loan is not secured on any asset you already own, such as a house, car or other assets and so is a riskier prospect for the lender. Therefore, they usually come with higher interest rates than their secured counterparts, are less flexible and levy high redemption penalties. Most “personal” loans are unsecured.
Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.
Income protection insurance
If you can’t work in the event of sickness or illness, income protection insurance aims to give you an income, with the amount of income set by you up to 75% of your gross (before tax) income with the premiums varying by how much of your salary you want to cover, as well as your age and health and when you want to start receive any payouts. Any payouts from income protection insurance are tax-free and usually continue until you recover, reach your selected pension age or the period of cover specified in the policy comes to an end. Income protection insurance does not cover redundancy but you can buy it as a bolt-on.
Does exactly what it says on the tin: covers the contents of your home for theft and damage and also may insure certain possessions (jewellery, cycles) outside of the home. Things to watch for include the excess and also the maximum payout on individual items. Another grey area is kitchen fittings, as some contents policies say these are not contents but part of the fabric of the property and covered by buildings insurance and some buildings policies don’t cover them because they regard them as contents.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.