Money down the drain
By Emma Lunn
There are numerous financial services that we couldn't do without, from current accounts to pensions. However, financial services and retailers are pushing numerous money-making products that we do not actually need. So to help you, here's our guide to the top five:
Payment Protection Insurance (PPI)
Between 6.5 and 7.5 million PPI policies are taken out yearly and are designed to cover loan or credit repayments should policyholders find themselves unable to make a payment.
One of the key problems with PPI is its cost. Even if the loan has a low APR, the PPI sold by the provider could mean you pay back much more over the term. Nick White, head of personal finance at uSwitch.com, cites the following example: "A £10,000 loan taken out over a five-year period with Bank of Scotland costs £11,661.05 in total, but if PPI is included it increases to £16,114.40. If PPI is bought from Paymentcare it costs £641.40.'
According to research from Morgan Stanley, the sale of PPI accounts for one fifth of banks' profits, and Citizens Advice claims premiums charged are three times the cost of actually providing the cover. So it's no surprise these policies are pushed heavily by the banks. Most vulnerable are the self-employed, contract workers, part-timers and anyone with pre-existing medical conditions. Consumer group Which? claims that cover is often automatically included in many loan quotes, meaning many borrowers often don't realise exactly what they are paying for.
Another problem is that when plans do pay out, many do not provide the anticipated level of cover. Plans sold alongside personal loans for example, often only cover repayments for a maximum of one year and credit card cover may only pay out on up to 10% of the outstanding balance each month.
Following complaints from Citizens Advice, the Office of Fair Trading is currently investigating the sale of PPI. In the meantime, if you do want protection for debts bear in mind products such as income protection and seek independent advice.
Beware of payment protection plans when buying financial products
And, if you do opt for PPI, make sure you shop around. PPI plans from independent providers such as Paymentcare or British Insurance are usually much cheaper than those offered by loan providers.
Mobile phone insurance
Around two million mobile phones are stolen each year, so when you buy a phone most providers will try to sell you insurance. This can add £5 to £10 a month to your bill and should cover you if your phone is lost or stolen and reimburse you for any fraudulent calls made.
However, a replacement handset can normally be bought from as little as £40 and mobile-phone insurance policies tend to come with a lot of exclusions. Peter Staddon of the British Insurance Brokers Association explains that if 'the owner leaves their phone unattended in a public place and it is stolen, then the provider can refuse payout".
If you have a very expensive handset it is a good idea to make sure it is covered in some way. Adding it to your home contents insurance might be the best idea. A number of insurance providers cover mobile phones as standard against theft, loss and damage as part of their personal-belongings cover. Customers should, however, be aware home insurance will usually not pay out for the cost of calls made on a stolen phone. However, as long as you tell your mobile phone provider as soon as you realise your phone is missing, you shouldn't end up with too big a bill.
Also known as service agreements or coverplans, extended warranties pay for repairs to or replacement of an appliance. This normally begins after the manufacturer's guarantee finishes. Although cover is available from specialist insurers and banks, cover is typically sold at the point of sale in shops.
Last April, new rules were introduced to regulate the sale of these plans. However, they haven't tackled the biggest problem and that's price. At Dixons a washing machine costing £164.99 comes with an optional £99 five-year coverplan, but statistics show that new appliances are most likely to break down in the first year, in which case you are covered by the manufacturer's guarantee. A Which? consumer report on product reliability also showed that 81% of washing machines did not break down at all in the first six years.
If you do want some kind of cover, check the terms of your credit card as some offer free extended cover when using the card. Meanwhile many household appliances will be covered for accidental damage by your home-contents insurance. If you do think you need cover at least shop around. Manufacturers often provide cheaper warranties, while companies such as Warranties Direct will insure several items under one plan.
ID theft protection
Having your identity stolen is a stressful experience and fraud prevention group Cifas says there were about 355,000 victims last year. Once they have stolen your ID, fraudsters might use your personal details to apply for credit cards or loans.
As a result, companies, including Halifax, BT and the Royal Bank of Scotland, offer ID-theft protection, but critics have accused them of cashing in on people's fears. Halifax's Identitycare policy costs £6.95 a month and policyholders receive a monthly update of any activity on their credit file. If they do become a victim of fraud, a Halifax caseworker will negotiate on their behalf in order to recover the losses. But in a report last year, Which? dubbed Halifax's identity theft insurance the "most useless financial product" and suggested consumers simply buy a shredder.
Which?'s view is backed up by Richard Brown of Moneynet. He says: "Few, if any, of these services appear to offer insurance protection against actual financial loss.'
Credit card cheques
Credit card companies are sending out thousands of unsolicited credit card cheques each year which allow consumers to draw money from an existing credit card account. They can be useful to purchase goods or services from organisations that do not accept credit cards, and they also allow cash payments into a bank account. But the cheques come with a raft of hidden charges and a higher interest rate than that normally levied on credit card transactions.
Price-comparison site moneysupermarket.com has found that some leading credit card providers charge an APR in excess of 20% when purchases are made using credit card cheques. Also customers often find that there is no interest-free period and may even be hit with an additional fee. RBS Platinum and NatWest Classic, for example, both charge 20.89% interest on credit-card cheques, and there is no interest-free period.
"Credit card cheques can be easily misconstrued as free money with the same charges as spending on your credit card," says Robert Kenley, head of credit cards at moneysupermarket.com. The OFT has called for legislation to protect consumers, saying unanticipated charges may be as high as £57 million a year.
Editor's note: Please note that this article is directed at UK residents. Always seek expert opinions before making any financial commitment.
With thanks to Interactive Investors where this piece first appeared.
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