Top 10 money deals to be wary about

The financial market is overflowing with a dizzying array of products that make it extremely difficult to reach an informed decision about which one suits your needs and goals.

A money deal that may be good for your grandmother isn't always perfect for you, neither for your one-year-old son. But there are products you should absolutely approach with caution for the sake of your financial health.

UK-based consumer group Which? has identified financial products that could potentially leave you seriously out of pocket. Some of these may not be available in the UAE, but this doesn't mean a salesman from another country won't sell you any.

So if you encounter one of the following, think really hard and read the fine print before you part with your money or sign on the dotted line.

1. Extended warranties

Watch out for this one especially when you buy big-ticket items such as electrical goods, as this can easily cost up to half as much as your washing machine or television set.

Dubai-based Sarah Lord, wealth planning director of Killik & Co, is seeing more electronic companies in the UAE offering this type of warranty deal. "These contracts are often very expensive to give you peace of mind."

"Before deciding to take out an extended warranty, consider the cost of the warranty over a three or five-year period and then consider how much it would cost you to replace the item if it breaks after this time. Often, it can work out cheaper to not take the warranty and pay to replace the item as and when it breaks down," she explained.

2. Mobile phone insurance

You have just purchased a very expensive mobile phone and now you will probably want to get some insurance to protect your investment. This may be a bad idea. In the UK, mobile phone insurance can set you back Dh600 a year. In Dubai, you can spend the same amount or even less on a home contents insurance policy that can cover not just your phone, but all the other treasured items in the house as well.

3. Secured loans

This is a type of loan in which you use your car or property as collateral. Experts said taking out this loan is risky because if you are unable to make the necessary repayments, you could lose your asset.

"The property or vehicle, or other assets, used in securing the loan is going to be possessed by the bank and sold at auction if you default on repayments. Trust me on this, when you default, the bank can repossess and sell for the best price as quickly as they can. But they will still sue you for the balance outstanding when the car sells for less than you owe the bank," said Steve Gregory, managing partner at Holbon Assets.

So, unless you are absolutely sure you can meet the repayments, you had better steer clear of this one. A better alternative would be unsecured loans or personal loans.

"If you need to get a loan other than a mortgage or a car loan, it is best to consider unsecured loans first, as often, the interest rate chargeable on unsecured/ personal loans is lower than secured loans. Also, a secured loan means that you are putting something up such as property for the loan to be secured against," Lord explained.

4. Packaged accounts

Bank accounts that promise loads of extra benefits abound here in the UAE and abroad. Some of the add-ons can be a travel or breakdown insurance and in most cases, customers pay a hefty amount in return. Some packaged accounts may be useful for some people, but experts at Which? said they are often not worth the money.

"Packaged products vary from bank to bank and it is always important to understand exactly what is being offered as part of the product. For example, if they are saying that travel insurance is included in the product, check out the terms of the insurance. Often, you will find that the insurance only covers the primary account holder, and even if it is a joint account that you hold, only one of you may be covered," said Lord.

"Therefore, in this case, the insurance is of little use if you always travel as a family as you would still need to arrange travel insurance for your other family members. Packaged products can be suitable for some if they offer the benefits that you need and meet your requirements exactly. Otherwise, they end up being expensive add-ons which are unnecessary."

So, unless you really need that insurance that comes with the account to you, you are better off avoiding this product. "The banks would not offer this if they did not make a profit on the programme. But if you are a high earner and appreciate convenience rather than value, go ahead with these programmes," said Gregory.

5. Debt management plans

If you are having difficulty keeping up with your numerous debts, you probably have thought about having someone help you sort things out, perhaps re-negotiate interest rates and payments with your creditors and manage the payments on your behalf.

Debt management plan operators or providers can do the job for you, but before your proceed, consider the risks that you are likely to face. "Debt management plans often end up being a very expensive way of repaying debt. The interest rate payable on such contracts can be substantial," Lord warned.

"Also, if an individual has a history of overspending and using credit to do so, a debt management plan can sometimes lead to the individual being in a worse situation as the debt accumulated to date is consolidated into the plan and then the individual runs up more debt through further personal loans."

If you are planning to use a debt management plan, you must be clear that you are using it to gradually repay your debts rather than free up credit limits on existing credit cards for more spending.

"I would suggest that a debt management plan tends to be the last resort option for clearing debt and often it is better to assess your finances and draw up a budget to repay the debt and make sure you stick to the budget that you put in place."

Also, Gregory advised that you need to be wary of organisations in the UAE that offer to arrange consultations with banks and management of your finances but demand an upfront fee before they even talk to you.

6. Store cards

They work like a credit card, often offered by retailers who entice customers with discounts on in-store purchases. This is different from loyalty cards and store-branded credit cards, which can be used anywhere in the UAE and abroad.

Which? said it is best to avoid this product because it comes with "massively uncompetitive" interest rates and lower credit limits compared with other card deals. "They are always expensive solutions because the company teams up with the bank to lend money to the consumer, and the result is the most expensive kind of credit in the world outside of loan sharks," said Gregory.

"Store cards, can only be used in the store [offering it] and therefore by their very nature are restrictive in their use. They charge high interest rates and if you do not repay the outstanding balance in full each month, they can cost a lot of money over the long term."

7. ID fraud insurance

In the UK, this insurance can cost about Dh35 per month or Dh420 a year. Experts agree that while you have every reason to worry about incurring some losses as a result of identity fraud, this may be bad value for money.

"It's an unnecessary product. If you take the same reasonable precautions most people take like never letting your pin number be known to others and lot leaving passport copies in the hands of people who are not entitled to them, and securing your e-mail accounts against hacking, then you are highly unlikely to ever see a need for this type of insurance," said Gregory.

8. Structured products

Experts at Which? believe these products are not only confusing and complex, they're also costly and not as safe as other people would think, so your money would be safer if you put it somewhere else. Besides, when the Lehman Brothers collapsed, some people who had invested in structured products backed by the bank lost their fortune. Now that's something to think about.

9. With-profit funds

If you invest in with-profit funds, your capital will be pooled with other investors' money and invested in a combination of bonds, cash, shares and property. Which? said this type of investment can incur high charges, so you'd do well to invest in stocks and shares Isas (individual savings accounts).

"With-profit funds in recent years have not performed particularly well, and there is now more choice from the various companies as to what you can invest in and therefore it is not necessary to choose [this fund]," said Lord.

"In traditional with-profit funds, the charges are opaque, i.e. the exact charge levied for running the fund is not disclosed and therefore it is difficult to be clear as to what charges are being levied on your plan."

"The investment choice has increased substantially in the last decade and therefore, there is often no need to select a with-profit fund. If you are currently invested in a with-profit fund, you should ask the provider what other investment options are available to you and consider whether it would be in your best interest to transfer to an alternative fund offered by the provider."

10. Payment protection insurance

The purpose of this product is actually good since it's supposed to meet your loan repayments in case you are unable to. However, Which? said it can be extremely expensive and often comes with exclusions that make it worthless if you do try and claim.

This product is being sold in the UAE and can cost about two to three months' worth of loan repayments. So, if your repayment on the loan is pegged at Dh3,000 per month, this insurance can cost as much as Dh9,000.

"The problem with this, as with all financial products, is that its value depends on whether there is a need, and whether the solution solves it. Salesmen should not sell something that is not needed by a customer, and when there is a need, the solution has to actually pay out when a claim happens," said Gregory.

So, do you need this product? If you're in the UK, where people don't go to prison because of debt, you may argue that payment protection is unnecessary, although you still need to keep your credit status clean. However, in the UAE, people do land behind bars over borrowed money. They do lose jobs and, hence, they need payment protection.

"Unfortunately, the chance of a successful claim against a payment protection plan from a UAE bank is no better than the chance of a claim against a UK one. Banks selling such rubbish deserve to be fined. Don't be convinced to pay for payment protection in the UAE unless you have been convinced, clearly and in writing from the bank, of exactly what the plan will cover. Ask them for examples of claims paid," advised Gregory.

"This is a bad product if it does not meet the needs of the customer. It is often sold in order for the customer to achieve their goal of borrowing, but is rarely explained and rarely is documentation issued that shows the extent and purpose of coverage. People simply are not made aware of the events they are covered for."