Money Sucking Financial Products

Financial scams, frauds, and outright criminal activity are easy to spot. Of course, the phrase “there’s a sucker born every minute” didn’t hit our lexicon without good reason. For the most part, we’re wise enough to see through—or at least be skeptical of—too good to be true financial products.

But there are financial products which aren’t outright fraudulent or illegal that can be just as harmful as the bad stuff. Products many of us see everyday and take for granted.

MoneySmartLife recently examined a few of these products. According to the article,

…not all the financial innovations have been positive; there have been some products and services created that can be a major drag on your net worth and even on your quality of life.

First up is payday loans. These storefronts have become so ubiquitous that I make it a game to count how many I can find while driving through a town or city.

These “lenders” use loopholes in state laws to get around maximum interest regulations. Your payday loan could cost you 100% to 500% depending on how deep in the trap you get caught.

Let’s say you borrowed the $400 for the refrigerator and they charged you a $20 fee. You write a check for $420 to be cashed 10 days from now. Even if you paid off the loan after 10 days you’ve paid $20 for 10 day loan on $400. That’s an annual percentage rate of 196%!

In a previous life, I owned a computer service company. I occasionally did work for one of these loan companies. What amazed me most was that they didn’t try to hide the exorbitant rates they charged. Rate sheets were plastered all over the walls in the waiting area. The first time I saw one, I thought it was a joke. I chuckled out loud to a disapproving look from the owner.

Next up are interest only mortgages.

Think about these scenarios that might lead you towards an interest-only loan:

1. You can’t afford a regular mortgage today, but some day your income will go up and you’ll be able to refinance into a standard 15 or 30-year mortgage that includes principle payments that will eventually lead to you owning the home.

2. You will never be able to afford the house, instead you rely on any gains from price appreciation from the price your purchased the house at.

Both of these could potentially result in you never putting a dime toward actually owning the home! Doesn’t sound like a good idea to me.

Another pitfall is that these mortgages “automagically” convert to a fixed rate after a predetermined number of years (3 and 5 years being typical) along with the principal payment. But what happens when the market sours, you lose your job, and you can’t sell your home? Hmm. That sounds a little familiar.

Read the rest of MoneySmartLife’s money sucking financial innovations and healthy alternatives.

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