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Top 10 Worst Financial Products: Part Two

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This is part two of our two part series looking at the absolute worst financial products out there. If you missed part one, check it out here. It included products like bank accounts with fees, credit card payment protection plans, and mutual funds with high costs.

As bad as those financial products are, however, they are not the worst ways you could be using your money. Here are the final 5 worst financial products. Let me know what you think of the list — and what might be missing — in the comments.

5. Certain Annuities

AnnuitiesThere are some annuities that work well for some people. Annuity products that are simple and straightforward, and that feature low fees, can actually provide a regular stream of income for retirees. Unfortunately, there are also annuity products that are downright awful. These are products that are complex, and come with a fee structure that is bloated and difficult to understand. Before you decide on any annuity, you need to have a trusted, independent financial professional look at the product. If you’re not careful, you could end up stuck with a terrible financial product that only makes your financial situation more difficult.

4. Credit Cards for those with Poor Credit

Stack of Credit CardsFor those with poor credit, it is tempting to get a credit card aimed at them. Unfortunately, these credit card issues are little more than financial predators. Many cards — especially unsecured credit cards — aimed at those with poor credit come with high fees, as well as high interest rates. There are fees for opening the credit card, as well as annual fees. Plus, there are low credit limits. It is not uncommon for these types of subprime credit cards to come with limits of $350 to $500, but have initial fees that run to $200 to $250. Instantly high credit utilization.

3. Interest Only Mortgages

Monopoly BuildingsInterest only loans are among the many factors to blame for the recent financial crisis. The idea is that homebuyers only pay interest on the loan — no principal — for a set period of time. After the initial period, the buyer has to start paying on the principal, and may even need to make a balloon payment at some point. Many homebuyers suddenly find that the payment they could “afford” was only that way because they weren’t paying any of the principal on the loan. A similar situation is seen with ARMs that have very low teaser rates.

Make sure that you can afford the home you are buying with the higher interest rates. Lenders might say that you can refinance later, but if home values drop, and you haven’t build much equity, that won’t happen.

2. Prepaid Debit Card

Prepaid Debit CardsOne of the worst financial products out there is the prepaid debit card. It sounds like a nice idea — plastic that is easy to use and that you don’t have to pay interest on. Unfortunately, prepaid debit cards often come with a plethora of fees and conditions. There are even fees for checking your balance! While it’s a nice thought that you can replace a checking account with a prepaid debit card (many allow direct deposit and billpay), the truth is that it will likely cost you more than you imagined, draining your wealth away. Look for a fee-free bank account. At the very least, consider a prepaid debit card with few fees, like Green Dot.

1. Payday Loans

Payday LoansAh, the payday loan. Any surprise that this was our absolute worst financial product? It has led many into financial difficulty. Payday loans have ridiculously high interest rates. They are also designed to be easy to renew, so that you remain in the trap. On top of that, they are not considered very favorable when seen on your credit history. Payday loans are terrible financial products, entrapping many and draining their resources.

(Photo: nicmcphee, kalleboo, wwworks, europealacarte, swanksalog)

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6 Responses to “Top 10 Worst Financial Products: Part Two”

  1. I don’t like prepaid debit cards, but AMEX keeps giving me free money for them. I got $75 free for opening 3 cards, then I got another 75 for loading 200 on each. I just take it all out at the ATM and pay a $2 fee and get free money!

  2. Ooops! Found the rest of the “top 10″.

    Great list, mahalo!!

  3. Absolutely, #1 (payday loans) is an evil product in my mind. It is nothing more than legal loan sharking and preys on the poor, desperate, or ignorant.

    Despicable business model, and is sad to see so many of them around in my town.

  4. Not only are the payday loans predatory, but high fee annuities, and Credit Cards in general. One is buying a service, and financial services are run by people with very smart lawyers and accoutants. This means that before utilizing any such service, a person must educate themselves. Otherwise you get fleeced, legally!

  5. Payday loans deserve the #1 ranking, in my opinion. They’re so lucrative for lenders that several Big Banks have entered the field. They call them ‘direct deposit advance’ or similar b.s.; cost to the consumer is comparable to a traditional payday loan–huge!

  6. JoeTaxpayer says:

    In general, I think annuities are great, for the salesman, not the buyer.
    Specifically, I actually think that immediate annuities can have a place in one’s portfolio. As one gets well in to their retirement and starts to fear outliving their money, an immediate annuity can provide a return well above the “safe return” rate they’ve been withdrawing. I help my mother in law who is now 85. She would get nearly a 14% return in an IA. So by putting a small portion of her assets in the IA (say 1/3) she’s given up some of her kids’ inheritance but boosted her spending money quite a bit.

  7. Olivia says:

    Interest only loans can be great if you manage it properly. When you make extra payments you reduce your principal and your payment is adjusted lower. With a fixed rate loan, if you make extra payments your principal is reduced but your payment stays the same. The key is always to know how your mortgage works and manage it!


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