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9 dangerous financial products

Too often consumers use services and products that lose them money rather than improving the bottom line.

By Donna_Freedman Jan 4, 2013 12:03PM

Would you pay $1,900 for a $600 laptop? Lock up your money for 10 years at today's interest rates? Opt for $300 worth of credit with a card that will charge you more than one-third of that amount in fees the first month?

Logo: CEO (Roy McMahon, Corbis)I wouldn't. But plenty of others do, according to Paul Sisolak at GoBankingRates.com.

 

"Time and again, consumers fall for financial products that may actually lose them money instead of build it. And it's not just a penny here or a dollar there," he says.

"Some banking incentives can be downright dangerous to our financial well-being, causing us to lose out on thousands of dollars over the course of several years."

Sisolak's exhibit No. 1: the 10-year CD.

Yes, I said 10 years.

Who can predict CD rates a decade from now? There's no do-over with a 10-year CD, he notes. Close the account and you'll be hit with fees.

"Combined with inflation, what your CD account was worth in 2012 or 2013 could be valued significantly less in 2020. And that's 10 years of your financial life you can never get back," Sisolak says.

Check out these eight other financial products and practices that can wind up costing you dough.

Someone's making money (hint: it's not you)

2. Overdraft protection.
Consumers must opt in for this service, and "banks have tried very hard to persuade them to do so," notes Miranda Marquit in this Wise Bread blog post. It's a moneymaker for the bank; according to a Pew study, 18% of U.S. consumers overdrafted their accounts last year. Better to get a handle on your spending than keep paying up to $35 for each oopsie. If you've currently got overdraft protection, you can always opt back out. Having your debit card declined is embarrassing, Marquit acknowledges, "but at least it is free."

3. Bank giveaways.
Is a free T-shirt or toaster really a good reason to select a financial institution? Even if it's a bigger-ticket item like an iPad, a free gift shouldn't be the deciding factor. Instead, focus on finding the bank that offers the services and products you need the most. (See "6 things to know when picking a bank.")

4. Buy here, pay here. Auto dealers who specialize in older, high-mileage cars at inflated prices are aiming at people "with few other options," according to MSN Money columnist Liz Weston in "5 stupid solutions to money woes." Interest rates are high (usually about 24%), borrowers often must pay in person, and a missed payment means repossession. Other options may exist; Weston suggests working with a credit union, or saving up and buying from a private seller on eBay or Craigslist.

'Nothing to show for it'

5. Subprime credit cards.
That's an industry term for cards marketed to people with no credit or bad credit. We're talking cards with 39.9% interest rates and a startling array of fees. Instead, save up $200 to $300 and get yourself a secured card. Putting the money aside isn't easy, but with a subprime card "you're going to end up paying that amount in fees (each year) and you've got nothing to show for it," says Curtis Arnold of CardRatings.com. "With a secured card, you'd get your deposit back."

6. Prepaid debit cards.
Not only do these offer lack the protection of cards linked to checking accounts, they come with fees that aren't always disclosed at the start. Of 16 major cards examined by Consumer Reports: 
  • Nine charged to activate the card ($3 to $14.95).
  • 13 assessed monthly fees (up to almost $10).
  • Seven charged for paper statements ($1 to $5.95).
  • Five assessed fees if cards were dormant for as little as 90 days.
In addition, some charged for customer service calls (50 cents to $2.99) and most charged for ATM withdrawals ($2 to $2.50, not including the charge from the ATM itself). If you hate bank-linked cards, at least try a credit union.

7. Zero-percent financing.
Suppose you're hit by layoff or serious illness eight months into your "12 months same as cash" deal? Too many consumers "don't understand retroactive interest," says Arnold of CardRatings.com -- and the interest rates are steep, as much as 24.99%. If you are disciplined enough to budget for monthly payments, and have some money set aside for curveballs like the ones mentioned above, then 0% financing might be a good deal. So might saving up for items and buying them one by one, and/or buying some things secondhand.

Not a 'reasonable solution'

8. Rent to own.
This Consumer Reports article on the RTO industry notes marked-up products, interest rates of up to 311% and a clientele of lower-earning consumers "who can least afford the higher costs." Even a high-interest-rate credit card is a better deal, according to the article: A laptop bought with a 29.99% credit card and paid off at the same $38.99-per-week rate would ultimately cost $1,000 less. More to the point, that same sum banked every week would mean a laptop paid for with cash -- at a savings of $1,260. "Bottom line: Avoid rent-to-own, even if it means postponing purchases until you can better afford them,"  the article concludes.

9. Payday loans.
These seem convenient, notes columnist Weston -- they're available to anyone with a paycheck or a benefits payment from sources such as unemployment or Social Security. However, for every $100 you borrow you'll pay at least $15; for a two-week loan, we're talking an annual interest rate of about 400%. "A payday loan isn't a reasonable solution to either a temporary crisis or a chronic shortage of funds," she says.

Readers:
Which financial products do you find ill-advised, foolhardy or just plain toxic?

More on MSN Money:

33Comments
Jan 16, 2013 3:31PM
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get a credit card with a 0% apr for a year or 18 months. buy gold, ammo, food. put money aside to pay it off when it is due, in the meantime you will have peace of mind. 
Jan 10, 2013 10:11PM
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Dyeing hair on scalp is has risks!
Jan 10, 2013 10:34AM
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my bank offers direct deposit advances at 1.50 for every 20 borrowed and has a spiel about how this is a very expensive way to borrow money.   their overdraft option is they will pay the check or bank charge and charge your account 35.  i think the direct deposit advance can be a lot cheaper
Jan 5, 2013 12:26PM
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Just say no to repulsive paper products offered by the scum of the earth:wall-street.
Say no to the manipulators and confidence men trying to convince you to buy paper, don't contribute to the churn, don't give them their nasty little fees on every iteration.  Most of the paper they pedal you don't need.

Jan 5, 2013 12:02PM
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I've taken advantage of zero percent financing, usually for electronics or furniture purchases, and never paid a dime of interest.  Just make sure that you have the money to pay off the balance in case of an emergency. Of course with the puny amount of interest you receive at the bank now, zero percent isn't what it used to be.
Jan 5, 2013 5:31AM
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My longest CD is 5 yr w/a VERY low early withdrawal penalty.  I am nearly 2 years in & have had NO reason to exercise the ‘escape’ clause.

 

I have also begun keeping a LOT more money in a money market account.  The rate is 5-10 basis points below what 1-2 year CCDs are offering.

 

I do NOT & never have participated in any of the other 'offers.'

Jan 4, 2013 6:55PM
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Why would anybody put money in a CD?GNMA`s are government backed  and historically

pay about 4% to 8% or more.That`s as safe and concervative as can be.

Jan 4, 2013 4:57PM
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One time I mailed my quarterly estimated income tax payment to the IRS--it's simply a prepayment of income tax since I'm self employed.  I messed up and wrote the check from the wrong bank account which didn't have enough cash to cover the check.     The IRS sent the check back to me because it bounced and I quickly sent them another one from the correct bank account.   Mind you, this payment is a VOLUNTARY payment and not a required one.   IRS charged me an $800 bounced check fee.  Yep, not interest, not a fine, but a "bounced check fee". 
Jan 4, 2013 4:46PM
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they didn't mention reverse mortgages
Jan 4, 2013 4:28PM
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An uninformed consumer is a sucker to lose everything and not be able to retire because of poor decisions.  Our educational system needs to be doing a better job of educating children about tools that will help them navigate in the real world about these things.  Isn't taught and is not going to be taught as long as the government has control of our educational system with the Department of Education.  This Department was created to only teach people to be dependent on the government.  Add to this the Teachers Union - main concern is TENURE.  Bad teachers and great teachers are all on the same playing field. and this promotes mediocrity!
Jan 4, 2013 4:27PM
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Quite sure I am right on this. A brokered CD, is different than a CD purchased through a bank. While a bank, has a one year or six month penalty, on a ten year CD, a brokered CD's value fluctuates with interest rates, and a early withdrawal could cost far more than a one year, or six month penalty, which you would get with a bank CD, for early withdrawal.
Jan 4, 2013 3:57PM
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I have a $600.00 overdraft at My credit union that just goes on to a visa card at 8.9% interest, there is no anual fee if You pay it off when it comes due,  there is no anual  charge, I never need it but it is just a perk for using a credit union instead of a Money sucking Bank.
Jan 4, 2013 3:24PM
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Rent to own locations are a rip off as well!  You wind up paying 2 to 3 times what the item is worth (at the start & even more over time as these items depreciate over time)
Jan 4, 2013 3:16PM
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My feeling is, if you were smart enough to read this, you were smart enough to avoid most of those traps to begin with.

Overdraft protection, if it means anything, is supposed to charge you a much LOWER overdraft fee than the default.  It basically works as a short term unsecured loan.  The interest rate is high, but you don't get hit with a $35 overdraft fee. I think the fee is something like $4 per transaction, if there is a fee at all, then a high interest rate on the unsecured loan for the time your account is in the negative.

 

Buy here pay here car lots are not legal in some states.  The loan has to go through a financial institution and only they are licensed to do any repo on default.  Car dealerships are highly regulated and there are many steps there to protect the consumer.

Jan 4, 2013 3:13PM
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As far as Madison Ave., Hollywood, and the politicians are concerned the average American earning a living or old enough to vote as the mentality of a 12 year old. Even if the average American reads this article he or she finds basic math and common sense too challenging and goes along with the advertising.

Jan 4, 2013 2:45PM
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A 10 year CD purchased 10 years ago would be a great deal right now!
Jan 4, 2013 2:32PM
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This gives me an idea to open a payday loan office.  Getting $15 for every $100 loaned out every 2 weeks sounds very profitable.  I don't see that as unfair as long as I am upfront to the borrower and he/she can chose to continue.
Jan 4, 2013 2:12PM
Jan 4, 2013 2:07PM
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Do credit untion charge you for overdraft fees? I don't think BECU does, but I could be wrong.
Jan 4, 2013 2:05PM
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Ten years is a long time for a CD, but you can get brokered CD's paying 2.75% for ten years.  Better than treasuries, which will never be paid back anyway.  Just like savings bonds.

 

 

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Donna Freedman

Donna Freedman, a writer based in Anchorage, Alaska, writes the Frugal Nation blog for MSN Money. She won regional and national prizes during an 18-year newspaper career and earned a college degree in midlife without taking out student loans. Donna also writes about the frugal life for her own site, Surviving and Thriving.

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