We highlight the misleading financial wheezes that could cost you dear.
Britons often find choosing the right financial products stressful and unrewarding, according to new research from the Financial Services Consumer Panel.
The organisation found product complexity to be a major stumbling block, with many products failing to do exactly what they said ‘on the tin’.
Choosing financial products can certainly become a bit of a minefield. Here are four sneaky catches you need to steer clear of - along with some straightforward, good value alternatives.
1. Warranty worries
When you buy an electrical product from a high street shop, it’s likely the salesperson will also try to persuade you to buy an extended warranty.
In theory, this provides valuable extra cover is the product gets broken or damaged - or if it breaks down.
However, be very wary of buying any warranties that are sold alongside products. Much of the ‘extra protection’ these warranties offer is in fact already afforded to you as part of your statutory rights as a shopper, or as part of your home insurance cover.
So in effect, you’ll be paying extra for protection you already have.
And in addition, warranties sold with products are usually very over-priced, and are stuffed with exclusions that make it very difficult to make a successful claim. Read Avoid this sneaky rip-off to find out more.
The solution
First, find out exactly what your consumer rights are. We’ve outlined some of the main ones here. Then, double-check what cover your home insurance offers.
Finally, if you still feel you need an extended warranty, search online for warranty cover from a stand-alone provider such as Warranty Direct. This is almost always far better value that the protection sold alongside products.
2. Ease of access
As the name suggests, instant access savings accounts are meant to give you immediate, penalty-free access to your cash whenever you need it.
This is why many people choose them over savings bonds or regular savings accounts - both of which pay far higher rates of interest.
However, several accounts calling themselves ‘instant access’ actually have nasty loopholes attached.
For example, some require you to give a period of notice before you withdraw your money. And others will penalise you financially for doing so - by, for example, not paying you any interest for months in which withdrawals are made.
Solution
Read all the terms and conditions carefully before you commit to an account, and make sure you choose one that is truly easy to access.
For example, the ING Direct Savings Account pays a decent variable rate of 3.1% AER (including a 2.56% bonus rate for 12 months).
You can open it with just £1, and make free, immediate and unlimited withdrawals whenever you need to.
3. Instalment trauma
When you take out certain types of insurance (typically car or home cover) the insurer will give you the chance to pay for it in monthly instalments.
The salesperson may even imply this is the easier choice, as it makes repayments more manageable.
However, don’t be taken in! If you choose to pay monthly - rather than by lump sum at the start of the policy - your overall yearly bill is likely to be much higher.
For example, I was recently offered a year’s worth of home insurance for just under £140 (if I paid all in one go). However, if I paid month by month, the overall bill would come to almost £170. Eek!
Solution
Pay in a single, lump sum at the beginning of a policy if at all possible.
If you can’t find that much cash upfront, consider taking out a credit card that offers 0% on new purchases for a certain period of time.
For example, the Tesco Clubcard credit card offers 0% on new purchases for 15 months. After that, the representative APR is 16.9% (variable).
So, pay for your insurance using the card, then pay off this debt month by month - making absolutely sure you clear the balance before the 0% period ends.
4. Horrible holidays
Many personal loans will give you the option of taking a ‘payment holiday’ before your repayment plan begins.
This sounds great in theory, as it gives you some extra breathing space before the monthly amounts start leaving your account.
However, as you may have guessed, these holidays aren’t as nice as they sound. In fact, they’re a wheeze used by loan providers to increase their profits.
During that initial ‘payment holiday’ period, the amount of interest you owe will continue to mount up. That means your overall loan debt will end up being bigger than ever.
Solution
Once you’ve chosen the right personal loan for you, refuse any payment holidays offered and try your level best to clear the debt as quickly as possible.
And to find out more about loan loopholes to avoid, read this recent article.
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