By Mark Williams
Buying a certificate of deposit at a bank or filing a tax return shouldn’t be a risky venture.
Yet some of the financial products being offered to consumers these days are just that.
Take a 10-year CD, for example. Locking down money so that it’s safe and sound for a long period of time may seem like a good idea. But interest rates are at rock-bottom levels and figure to eventually start heading higher in the years to come, meaning the interest rate on that 10-year CD could look pretty paltry in a few years.
“You have nothing to gain literally and everything to lose,” said Jeffrey Kosnett, senior editor of Kiplinger Personal Finance and Kiplingler.com.
Risk for consumers, though extends beyond something as simple as a bank CD. A few examples:
Typically, the longer the term of the CD, the higher the rate consumers will receive. That’s true even in today’s era of super-low rates, but it’s still not much. JPMorgan Chase & Co., for example, lists the interest rate on a 10-year, $10,000 CD as 1.01 percent. That’s nearly twice the 0.6 percent a five-year CD pays. Consumers can find higher rates by shopping around.
A bank in Florida offered last year what seemed to be the ultimate deal: a Mercedes in exchange for a $1 million, five-year CD. The car would be provided to the customer in lieu of the tiny 1.2 percent interest rate the CD would otherwise earn. The CD will generate tens of thousands of dollars in interest over the five years, and shopping around could lead to a bank with a higher rate. The car, meanwhile, will drop in value.
Sign-and-drive auto loans
It seems simple and easy: Go to a car dealer, take a test drive, sign your name on a few documents, avoid a down payment and off you go in a shiny new car. Only when the first payment comes due do you realize that all those costs and taxes that you managed to avoid when you drove off the lot have now been rolled into your monthly payments.
Prepaid debit cards
Prepaid debit cards seem handy. No worry about not having a bank account or having a load of cash in your pocket. Money easily can be loaded on to them. They don’t put consumers into debt like credit cards. Still, many carry an assortment of fees and other costs that can eat away at their value. There can be fees for activating the card, using the card and getting cash from an ATM. If the card is lost or stolen, it may not have the same protections that come with credit cards.
These are the programs that offer to “fix” your bad credit and give you a sterling credit score going forward. Typical programs offer to dispute inaccurate information on your credit reports, something that consumers can do on their own. Others will, in effect, create a new credit identity for you that experts say is illegal. Some programs take your money and don’t do anything. The best way to repair your credit is to start paying your bills on time, experts say.
Despite the high-profile attention Bernie Madoff received, Ponzi schemes continued to be ranked as the No. 1 investment scam in Ohio. Con artists learn to take advantage of those who have come to trust them from church, social groups or friends. “There is no such thing as a no-risk, high- return investment,” said David Goodman, director of the Ohio Department of Commerce. “No matter how enticing the pitch may sound, the adage still applies: If it sounds too good to be true, it probably is.”
The quick money from a loan tied to your tax refund is enticing to pay holiday bills, make a car or home repair, or splurge on a new television.
Under some programs, the cost of tax preparation can be deducted from the refund and consumers can get at least a portion of their refund in a day or two. The downside is that the loans can be costly and might be unnecessary.
Filing electronically has cut the time it takes to get a tax refund by weeks. Last year, the Internal Revenue Service was able to issue refunds in 21 days or less to more than 90 percent of taxpayers who filed electronically and opted for direct deposit. The IRS is anticipating the same results in 2013.
Tax-refund or anticipation loans are heavily marketed to those taxpayers who claim an Earned Income Tax Credit on their return, said David Rothstein of Policy Matters Ohio.
“Tax loans ... are usually a bad bet for families,” he said.