When something seems too good to be true, it usually is.
That may be a tired adage you’ve heard a million times, but it could pay off to reconsider the next time you debate using certain products and services. (Another old-time favorite: There is no free lunch.) Think about it: If a business stands to make a lot of money if things don’t work out well for you, maybe you should rethink being a customer.
David Hagenbuch believes you should take your business elsewhere. He’s an associate professor of marketing at Messiah College in Mechanicsburg, Pennsylvania, and founder of MindfulMarketing.org, a website for advertisers that encourages ethical marketing.
He recalls growing up in the 1970s and 1980s, watching his dad run a specialty advertising company. It was one of those businesses that provided a “mutual benefit,” Hagenbuch says. And most businesses offer a mutual benefit, he adds.
“However, every once in a while, an organization, and sometimes an entire industry, finds a way to consistently grow its own earnings at the direct expense of its customers,” he says.
There are a number of businesses that do very well when you don’t. They include:
Casinos. There’s an understandable appeal to betting at a casino. Flashy lights, the noisy but jubilant sound of a slot machine and the possibility of winning a windfall of money. What’s not to like?
Well, you might not win. Casinos brought in $37 billion in revenue in 2012, the latest-available figures from the American Gaming Association. While some of that cash undoubtedly came from soda and shrimp cocktail sales, plenty of it came from people who lost money while gambling.
“Casinos present an inherent conflict of interest: When two parties take opposite positions in a bet, only one can win. Casinos will often ban their best customers if they win too much,” Hagenbuch says.
Rent-to-own stores. At these stores, you’re allowed to rent furniture or electronics, and after a certain number of payments, you eventually own the product. It sounds reasonable enough, and the reason the $8.5 billion industry has grown in recent years is that it allows people without a lot of money to furnish their homes with inexpensive weekly or monthly payments. And you may end up being a satisfied customer. According to a landmark study in 2000 by the Federal Trade Commission, 75 percent of rent-to-own customers were satisfied with their experience.
But renting to own is widely considered a terrible financial decision. The payments are often low, but in many cases you have to keep making them for weeks, months and years.
“The number of payments is often so high that consumers end up paying two to three times as much as they normally would for a TV, couch or refrigerator,” Hagenbuch says. “And if they fail to make a payment, they lose everything they’ve paid to date, as well as the item.”
If you are thinking about renting to own furniture, appliances or electronics, type the name of the store into a search engine along with the word “complaints.” You won’t have to look hard to find horrific stories of punitive fees and aggressive repossession tactics for missing payments, and of appliances and electronics not working properly.
Payday lending stores. If you crunch the numbers and are certain you can pay the loan back plus the interest, without having to borrow soon after, taking out a payday loan once in a blue moon can be a perfectly valid and useful way to borrow money until your paycheck arrives.
The problem is: The odds of your payday loan experience going well are not in your favor, according to a study released in 2014 by the Consumer Financial Protection Bureau.
It looked at 12 million loans from payday lenders in 30 states and found that 80 percent of payday customers rolled over loans (they just paid the interest but still owed the original loan) or took out new loans within two weeks (which means they paid off the loan and then took out another loan, since they were broke, once they paid off the loan).
If you’re thinking of taking out your first loan, keep in mind there is a 15 percent chance — according to the study — that you will find yourself not just taking out or rolling over a new loan in two weeks, but that you will be doing this for at least the next 20 weeks. So if you were to take out a $500 loan, depending on the payday lending store, you might pay $75 to borrow that for two weeks. If you were to continue this for five months, continually paying off the loan and re-borrowing $500, you could theoretically spend $750 in interest on a $500 loan that you keep rolling over.
Or you could end up spending far more. For many consumers, according to the CFPB study, “loan size is more likely to go up in longer loan sequences.”
Credit cards. Plenty of people use credit cards responsibly and without problems — and as tools for building credit, enabling them to get a mortgage, buy a car or take out other kinds of loans. That credit cards are on this list doesn’t mean you should cut them up.
But not everyone uses credit cards the way they should be used, and not every credit card is a winner. You should be wary of credit cards that have a low introductory rate but will convert to a higher rate later, Hagenbuch says.
“Credit card companies draw in new customers by offering 0 percent APR for an extended time period,” he says. “But they do best when they charge retroactive interest rates, sometimes as high as 28 percent, to customers who don’t pay off their balance before the no-interest period is up.”
Mitch Tarala knows firsthand the pain this can cause. “It’s because I fell for these credit card rates that my business suffers today,” he says.
Tarala, a Canadian who lives in Saskatoon, Saskatchewan, and owns Vapor Jedi Industries, an e-liquid and e-cigarette retailer, says he had a Visa card that offered teaser rates, around 6 percent in fees.
But when Tarala missed the deadline for a couple of payments, his rates jumped to 21 percent.
When Tarala tried to consolidate his car and other loans, his bank refused and instead offered him a similar credit card with a low interest rate. That didn’t work out as well. Eventually, Tarala stopped making payments altogether. Four years later, he says he is still working on a settlement with his bank.
“I have been denied credit card processing for my business on many occasions with several different merchants and credit card processing companies,” Tarala says. “Until I get a better credit rating, I will continue to have this problem.”
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Beware of Companies That Win When You Lose originally appeared on usnews.com
