4 Big Rip-Offs To Watch Out For

I’ve made my share of bad financial decisions over the years, but nothing feels worse than when a salesperson convinces you to buy something that’s not in your best interest.  These kinds of rip-offs usually occur when one party has more or better information than the other.

Think about the first time you bought a car or the first time you went to the bank to sign your mortgage documents.  Who controlled the conversation?  If you were like me, you probably deferred to the “expert” sitting across the desk and happily signed everything they put in front of you.

Related: 10 Fees To Avoid Paying

What you might not have known at the time is that some of the extras, such as extended warranty coverage or creditor insurance, were completely optional and most likely a giant waste of money.

Here are four big rip-offs to watch out for:

Mortgage life insurance

If you own your home, chances are you were offered mortgage life insurance from your bank.  This type of insurance is not a requirement to qualify for a mortgage, but it’s made to look that way by many lenders who suggest it at a time when you’re vulnerable and haven’t shopped around.  You’ll even have to sign a waiver form if you decline the coverage.

The reality is that it’s generally not a good idea to buy mortgage life insurance from your bank.  It’s the one financial product that goes down in value as you continue to pay – also known as a declining benefit.  Term life insurance is much cheaper and offers greater protection.

Extended warranty coverage

It’s almost guaranteed that you’ll be asked to buy an extended warranty the next time you purchase an appliance or any high-end piece of electronics.  The reason for the hard sell is that retailers have big profit margins on these contracts.  Stores keep 50 per cent or more of what you pay for extended warranties or service plans, according to Consumer Reports research.

Consumer Reports recommends against buying extended warranty coverage.  One reason is that most repairs may be covered by the manufacturer’s warranty, which should last at least 90 days or longer.  Their research suggests that if a product doesn’t break while the manufacturer’s warranty is in effect, it probably won’t during the service-plan period.

Related: Gadget Insurance – Is It Worthwhile?

Many credit cards will double the manufacturer’s warranty when you use the card to make the purchase and register the product.

Balance protection insurance

One common telemarketing pitch from banks and credit card lenders is for balance protection insurance.

For a cost of about 99 cents per $100 of the average daily balance (about 1 percent per month) you can protect your credit rating against unexpected job loss or disability.

Customers might agree to add this protection to their credit card thinking that because they pay off the balance in full each month they’ll avoid the fee.  Not so.  The fee is based on the amount owing on your statement due date, or on your average daily balance, depending on the card issuer.

Balance protection insurance is aggressively marketed to unsuspecting customers and should be avoided.

You’re much better off protecting yourself with a small emergency fund, proper term life insurance and disability insurance.

Door-to-door sales pitches

It may be tempting to sign up for a home security system, or switch to a new energy supplier to save a few bucks.  But always be cautious about door-to-door sales pitches.  They may use deceptive pitches or questionable tactics and sell substandard, but expensive products or service contracts.

Related: How To Protect Yourself Against Identity Theft

Reputable businesses shouldn’t require your signature at the door.  Take your time and read the documentation at your leisure.  If the sales pitch has a limited time offer attached to it, ask the salesperson to leave immediately and close your door.

Shop around for competitive quotes from businesses offering similar services.  Contact the Better Business Bureau to investigate the company or to get a list of businesses offering similar service.

Before you sign any contract, take the time to read the fine print.  Don’t get pressured into signing a contract on the spot.

Final thoughts

I’ve fallen for the extended warranty pitch a few times before and I’m guilty of signing up for mortgage life insurance on my first mortgage term.  These days I’m a lot more cautious and borderline skeptical of any sales pitch that comes my way.  I can spot a rip-off or a scam a mile away.

Related: Why Do People Fall For Telemarketing Scams?

What other rip-offs should you watch out for?


8 Responses to 4 Big Rip-Offs To Watch Out For

  1. Brian So says:

    Totally agree on mortgage life insurance. Decreasing benefit, not guaranteed renewable. Heck, you can’t even name your own beneficiary!

  2. David Tucker says:

    Mainstream banks were notorious for trying to get consumers to add balance protection insurance when calling in to activate a new credit card; several times it was even added on without my consent. Ended up sending a letter to Assurant atleast once to get this scam monthly charge removed.

  3. Justin says:

    BMO calls me up about every 6 months to sell me balance protection insurance. They graciously add it for for free for one month and then if you don’t want it you can cancel it. Sure is nice of them….

  4. Car rental add-ons are usually a ripoff. Extra insurance coverage can easily double the cost of a rental. Most credit cards already offer insurance so it isnt necessary. Rental companies also offer extras to rent (ie. GPS, car seats) at highly inflated prices (and high profit margins)

    • Don says:

      There’s a good chance that you already have rental insurance on your current auto policy. The only time I take it is when I’m on a work trip, but that’s because my insurance company would be very upset if I used it in that case.

    • Car rental addons are a huge ripoff. But I won the lottery on it one time when I was young. My car got hit so I was using a rental paid for by insurance. When I rented it, I figured since it wasn’t costing me anything to rent, that I’d drop a few bucks on the insurance ‘extras’. So I bought *everything*.

      The next day, someone backed into the rental. Still drivable, but damage. And the day after that, the rental got broken into and was undrivable. That necessitated a tow.

      My cost for all that? $0. And I learned something interesting. The car rental place self-insured on the extras! I paid them like $50 or something, and the owner had to put all the repairs through his own pocket. Not good, but I guess they make enough money that self-insuring like that makes sense.

      I wouldn’t buy the extras again, I got out lucky once when I was young and stupid :).

  5. Susan says:

    Most people don’t have a clue and don’t come prepared when buying a house. So since a person is on the hook on an accepted offer to purchase it is best to buy the mtge ins and then go shopping. It can be cancelled within 30 days no charge. Same with creditor ins. As for extended warranty check your credit card which can be a feature and purchase the item with the card but hang onto the statement.

  6. Totally agree on mortgage life insurance, been there, done that, never again :)

    Never bought balance protection but what a waste.

    Good post Robb.

    Mark

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