My wife and I bought our house five years ago. I remember looking over the list of closing costs and seeing a line for title insurance. Title insurance, which costs in the neighborhood of a few thousand dollars, is something that boggles my mind even to this day. It’s an example of something that is a 100% legal and 99% rip off. There are some things in life that are obvious rip offs, like pay day loans, and then there are others that aren’t so obvious. Today, I wanted to point out a few of the biggest legal ripoffs in the financial world. Some of them are completely avoidable. Others, however, are not.
In this article, we take aim at bank fees, extended warranties, title insurance, college textbooks, and car rental insurance.
Banks make billions a year off the fees they charge, from insufficient funds fees to account maintenance fee. Unfortunately, many of these banks are publicly traded. What this means is that once you collect a dollar in fees, you have to collect that dollar each quarter or your investors complain. Not only do you have to collect that dollar, you need to collect an extra one or your investors will complain. Years ago, I’m sure it took a few dollars to process an insufficient funds fee when the process was manual and the check had to be sent to one of the clearinghouses. Nowadays, with Check 21  and computers, the cost to process a bad check is much lower. It’s not $35, which is the average fee for a bad check. Two cents to the processing, $34.88 for the old income statement.
While government regulation seems to be the direction we’re headed, I think customers should vote with their wallets. Credit unions and community banks typically have more customer-friendly fee schedules. Some banks, like ING Direct, don’t even charge a fee on overdrafts, they charge interest on a small line of credit. Find a bank that doesn’t rip you off and isn’t addicted to income statement cocaine.
If you buy anything from an electronics store, they will almost always try to sell you add-ons like an extended warranty. There are two parts of this process that are enormous rip offs. First, the extended warranty itself. The manufacturer of the device will always have a warranty. If you buy it with a credit card, the card will usually double the manufacturer’s warranty to at most an additional year (6 month manufacturer’s warranty becomes an extra six months, 2 year warranty becomes an extra year). The extended warranty from the electronics store is almost always redundant, but they’ll try to sell it to you anyway.
Second, since when did we start accepting device failure within a couple of years? We started accepting it when guys in fancy MBA suits began touting “obsolescence” into their product plans. Why make a durable product if we plan on cannibalizing the market in a couple years with a new gadget? I understand that the Nintendo is technologically inferior to an XBox, but the most I ever needed to do was blow into the cartridge to get it to work. We’ve come to accept device failure within a few years because manufacturers never intended for us to use them that long. That’s a scam.
When you buy a home, you will be required to buy title insurance. Title insurance costs a pretty penny. In fact, it’ll cost tens of thousands of pennies. In return, you get the assurance that the title is legitimate and no one has claim on your home. If they do, the title insurance company insures you against those claims. Sounds good right? Except you’ll need to buy it each time you refinance.
In theory, the title insurance premium goes towards research and insurance. They are supposed to research the history of the title and ensure it’s legitimacy. If that’s the case, why is it necessary when you refinance? There is no transfer of ownership because you still own the house. The title will not have changed pre- and post-refi, yet the title insurance company still wants to get paid. They will, essentially, do nothing for what you pay them. Unfortunately, there’s no way around it if you need a mortgage, as the bank has to have protection (and you pay for it).
I was too quick to call title insurance a ripoff. In the original post, I pointed to title insurance on a refinance as the reason why I thought it was a ripoff but there are several good reasons why title insurance is important on a refi – such as a check to see if there are any outstanding liens on the title. So I retract my assertion that title insurance is a ripoff, though at times I think it can be overpriced (title insurance companies don’t necessarily offer a discount on refinances, even if they did the research the first time and only have to review a few years of history).
The college textbook market is one hell of a racket. It exists because for a lot of students, the person buying the textbook isn’t the one paying for it. Many people get financial aid, which must be spent on education related materials, so they buy textbooks without considering the cost. Others get financial assistance from their parents, so they care very little too. That leaves everyone else, the people who make the buying decision and work extra hours to pay for it, paying “Brand New” prices for books that should be “Used.”
Why? Textbooks change for no apparent reason. You can’t tell me “Chemistry” needs a new edition each year. I don’t care what’s on the cutting edge of chemistry, an introductory university text on the subject should be the same today as it was in the 1980s. Put all the new developments since 1980 in Chemistry II. I understand there may be some fundamental changes in the last 40 years, Chemistry I will put the lessons in Chemistry II into historical context.
Car Rental Insurance
Liability damage waivers… that’s the code word for one of the insurance add-ons a car rental salesman or woman will try to sell you. It’s nothing more than your own car insurance, which covers you for rental cars, so getting it is really being double covered. The only benefit is that if something does happen, you don’t have to deal with it. It’s, however, ridiculously expensive. Just take the rate they charge, multiply it by 365, and compare it to your own insurance.
It’s not worth it unless you’re an absolutely terrible driving and you expect to crash the car. Actually, if you’re like that, ask someone else to drive.