We have previously looked at how you are probably getting ripped off by the financial products you currently have.
There are other financial products out there that, no matter who and when you buy them from, are always a bad idea.
In this post we will take a deeper look at 3 such products and demonstrate how they are all likely to lead to buyer’s remorse.
Extended Warranties – “How can I lose!”
Extended warranties essentially work like this – you buy a $2,000 television and the salesman will offer you a 3-year extended warranty, above the manufacturer’s 12-month warranty, that will protect in the event of damages for $200.
Sounds like a reasonable deal for such an expensive product….right?
The salespeople certainly think so – but so do numerous consumers; in a Choice survey of 570 respondents who had been offered an extended warranty, 65% had purchased one.
The first problem with these warranties is that they may have complex terms & conditions that prevent standard repairs. The second problem is that you are very unlikely to claim, and retailers know it.
The Bathtub Curve & Consumer Law
Most consumer appliances (where lots of extended warranties are sold) have what is called a bathtub curve of failure expressed in the following graph:
What the graph shows is that these products are most vulnerable to failure when it comes out of the factory (due to manufacturer defects) or later in their life due to wear out. Retailers are very aware of this and that is why they offer the warranty in the period when the product is least likely to fail.
Furthermore, under Australian consumer law, you are usually automatically covered for a set period after purchase which, for TV’s for example, might be anywhere from one to three years – this makes it more unlikely that you will actually ever need the extended warranty.
Like a lot of things in life, the Simpsons might be the only thing you need to know about extended warranties. In an episode, Homer has a crayon hammered into his nose to lower his IQ. Homer’s ever decreasing IQ is evidenced by him making stupider and stupider statements – the “surgeon” knows the operation is complete when Homer finally exclaims:
“Extended warranty! How can I lose?”
Car Hire Excess Reduction
If any of you have hired a car you will know the first thing the agent will do when you pick it up is offer you to reduce your excess (i.e the amount you have to pay if the car gets damaged) from, say, $4,500 to $500.
Sounds like a pretty good idea…
You will also have noticed that this excess reduction is often the same price as the car hire itself – if not more.
Have you ever wondered why these companies are so keen to offer you these policies? The reason is that they are insanely profitable for the car hire companies.
To calculate how profitable these policies are for the rental company it is best to look at the alternative option for this cover – this is primarily done through standalone policies (i.e done through a 3rd party rather than the rental company). The table below looks at what you will pay with these policies vs going through the car rental company on a 3,5 & 7 day car rental:
|Through Rental Agency||Standalone Policy|
|3 Day Rental||$88||$28|
|5 Day Rental||$147||$40|
|7 Day Rental||$206||$49|
The car rental companies charge 250-350% more than what the product should realistically cost. It is also worth noting that the standalone policies in this comparison reduce excess to $300 while the car rental companies are anywhere between $500 – $1,000.
What’s more, a lot of travel insurance policies cover this excess reduction so there is a chance you are already covered either by the policy or your credit card.
All options discussed so far will have terms and conditions that make them differ in slight ways.
Ultimately, being prepared and making sure you arrange excess cover before you get the car could make sure you don’t get ripped off.
Credit Card Insurance
Credit card insurance is a policy designed to pay off a certain amount of your credit card if you lose your job, get injured or die. It is usually offered to you through the card lender when you apply for a new credit card with the fee automatically added to your monthly bill.
What’s Wrong with That?
Much like mortgage protection insurance, the policy itself doesn’t sound all that bad, however in practice the policies are actually very expensive.
Additionally, the chances of you claiming are very low as there are so many exclusions and hidden terms and conditions that are often not made clear when the policy is purchased. In fact, between 2011 and 2016 claims on policies like credit card insurance (known as consumer credit insurance) were rejected more than any other insurance product. During this period, claims were declined five times more often than general insurance claims, and 33 times more often than car insurance claims.
So Bad It Might Be Illegal
Just over a year ago CBA paid out $10 million in refunds to more than 65,000 customers who were sold credit card insurance who would never have been able to claim.
Additionally, there is a law firm that is currently filing a law suit against NAB & MLC for customers who “have been sold seemingly worthless or junk credit card insurance.”
You would have noticed a common trend with all the products discussed so far – on their surface they sound like prudent financial purchases and therein lies the danger, sellers of these products know this and will make you feel like you are doing the right thing by buying these expensive, ineffective products.
Plenty can help you make smarter financial decisions by giving you a free financial roadmap – we also offer low cost subscription services, so you can have your very own personalised adviser to ask about all of your financial products – the good, bad and ugly.
The information contained on this page is of a general nature and may not be appropriate for your personal circumstances. You should obtain personal financial advice before acting on this information.