Five Lousy Financial Deals

Finance companies do offer good deals much of the time but there are certain ones that shouldn't be touched with a bargepole.

It's probably true that many of us are much more financially savvy these days, thanks in part to the wide availablity of information on the Internet. But there are still some financial products that we seem to get conned into buying time and time again.

Here are five financial deals that Fools should avoid using like the plague:

1. Extended Warranties

Extended warranties got a bad name for being over-priced and oversold, often by pushy sales staff. Indeed, an investigation by the Compeitition Commission branded them 'unfair and uncompetitive' with some warranties costing nearly as much as half the value of the goods being covered!

Last year the government introduced legislation forcing retailers to display the cost of an extended warranty next to the price of the item to enable consumers to see at a glance just what they're paying for. Customers now have 45 days to cancel a contract that they've bought on the spot and they also have 30 days to come back and buy a warranty - thus giving them time to shop around for a better product. Extended warranties are still generally a rip-off though.

2. Payment Protection Insurance (PPI)

These policies which are flogged to you when arranging your mortgage, loans and credit and store cards, are designed to cover your payments in the event of accident, sickness and unemployment.

Lenders are extremely keen to sell this cover as it's one of the most profitable financial products around. However, insurers price it to provide a profit margin of around 80%, most of which ends up as commission paid to lenders. In other words, it's often five times more expensive than it needs to be, not to mention the fact that the small print of these policies is usually peppered with various exclusions and get-out clauses.

The fact is you are paying your insurance premiums to the bank to protect them against you being unable to repay the loan. So whilst it may be great for them, it's not necessarily in your own interests.

3. Endowment mortgages

Twenty years ago endowment policies were the most popular route to repaying mortgages. Now, thank goodness, they're the least popular method with new homebuyers but millions of people are still saddled with them. They're inflexible, subject to high charges and investment returns have in the recent past been poor.

The default option for anyone wanting to be certain their mortgage will be paid off at the end of the term should be a repayment mortgage. If you really want an interest-only mortgage, whereby you pay back all the capital in one chunk at the end, then you're likely to be far better off backing it up with something like a cheap index tracking ISA.

4. Guaranteed Equity Bonds

These are lump-sum investments that give you some exposure to stock-market returns, but generally guarantee that you'll get your money back if the markets fall. However, you can't get at your money during the term of the bond and the maturity value is usually only based on the average level of the Footsie during the final 12 months of the term. You also don't get any dividends because you're not the one investing in the stock market - the bond issuer gets them. And if the stock market stagnates and you end up only getting your capital back, inflation will invariably have nibbled away at its value.

5. Credit Card Cheques

If you ever receive blank cheques from your credit card company, bin them immediately! The charges for using them are astronomically high but many people don't understand how they work.

The fact is, the moment you use one you pay interest straight away on what you've borrowed and it's frequently at a fairly high rate - 20% is not uncommon. Then there are the handling fees of around 2%. And woe betide you if your cheque takes you over your credit card limit - that's when the penalty charges kick in.

You also don't get the same degree of protection as you do when you use the actual credit card where card providers are equally liable for a breach of contract by the supplier in respect of items worth between £100 and £30,000.

Forget these lousy products and get some dandy deals! Compare credit cards, compare loans and compare savings accounts here at the Fool.