The Five Biggest Financial Rip-offs Today

29 November, 2011

It’s a sad commentary on human nature that there are so many ways that people can get ripped off these days. The worst part, is that many of the rip offs come in the form of legitimate businesses, products or opportunities that, while not illegal, border on immoral or unethical. There can’t be enough regulations or consumer police to protect everyone from scams or rip-offs (and, do we really want more regulations or consumer police?)

So it is up to all consumers to educate themselves, do the due diligence and use their common sense when something looks too good to be true, especially in the area of financial products and services. Unfortunately the list of financial rip-offs is long. We zero in on ten of the more prevalent rip-offs in two parts. Here’s part one:

Pay Day Loan Rip-offs

It’s a common sign of the times. The struggling economy continues to plague an increasing number of people who are forced to turn to just about anyone or anything to stay afloat. Unfortunately, this has given rise to an industry that earns its profits off of other peoples’ misery – pay day loans. But the problem for most people is that, when their paycheck arrives, it’s already spent on other things and they are unable to pay the loan off when it comes due.

Pay day loans, which are generally issued in amounts of $100 to $1000 to just about anyone who receives a paycheck, charge a steep interest rate. The cost to “service” a $500 pay day loan can run as high as $150 a month, and interest rates as high as 700% have been reported to the Consumers Federation of America. These loans should be avoided at all costs.

Extended Warranty Rip-offs

Extended warranties are pitched by appliance, computer, TV, and even auto dealers as essential protection against faulty products. The reality is that they are nothing more than a financial bonanza for the retailer. Retail salespeople can earn as much 50% of the cost of the warranty, which is why they push them so hard. Most of these products today will survive the extended warranty period. Plus, if you use the right credit card, it will include an extended warranty benefit that can double or triple the manufacturer’ warranty. Keep your money.

Gold Collector Coin Rip-offs

Gold investing is attracting a lot of novice investors, and many are being drawn to the dealers advertising on TV these days. Gold bullion coins are appealing because they can be purchased in smaller denominations and more easily stored. The mark-up on newly minted investment-grade coins, such as the American Gold Eagle or Canadian Maple Leaf is somewhere between 5 and 15 percent.

But, many dealers will apply a “bait and switch” by offering gold collector coins instead, and charge a markup of as much as 50%. The problem is that, while collector coins can command a premium in the collector market, their actual “metal” or “melt” value is much less. So, if a new investor hopes to cash in their collector coins for the spot price of gold, they will only receive a fraction of what they invested.

Mutual Funds with Sales Load Rip-offs

With over 5000 mutual funds from which to choose, investors have a difficult enough time finding the ones that are most suited for their objectives and risk tolerance. But the structure of mutual funds, with all of their fees and expenses can make it especially troublesome if you’re trying to minimize your costs, and enhance your investment returns. Mutual funds are required to disclose all of their fees and expenses, and express all their costs in terms of an “expense ratio” so investors can compare them.

The problem is that the funds that also charge a sales load often don’t include these charges in their expense ratio. Some funds charge a front-end load of up to 8%, while others charge an annual “marketing” fee, called 12b-1, of as much as 2% per year. Many funds will lower their sales charges or charge no load at all, but then they will increase their annual management fees.

There are a growing number of no-load and low expense mutual funds that perform just as well, if not better than load mutual funds. Index funds, which have performed as well as actively managed funds over time, charge no load and their expenses are very low. There is absolutely no reason to pay high sales charges or excessive expenses for a mutual fund.

Debt Settlement Rip-offs

Another sign of the dour economic times we live in is the proliferation of debt settlement firms. They prey on individuals in the deepest despair over their crushing debt. They offer to work with your creditors to settle your debt for a fraction of what you owe. The reality is that they don’t do anything that you couldn’t do yourself, yet they charge a hefty upfront fee and a monthly management fee.

You are told to stop paying your bills, and instead make the payments to them which they hold in an account. Only after your credit accounts are in or near default do they contact your creditors who, by then, may be willing to settle. But then, if they are willing to settle (and many aren’t) they would do the same for you if you simply contacted them yourself.

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