Don't leap at alluring financial offers without digging deeper
''Things are not always as they seem.'' That may be a cliche, but some phrases become cliches because they're true. Take the business of borrowing and lending money.
Recently, two examples of this cliche in action were brought to our attention. Both come from financial service firms that lend money, and both illustrate the same problem: a lack of adequate information that could help consumers make a better decision. And both show the need for consumers to ask plenty of questions before signing on any dotted lines.
The first example comes from an insurance company. A colleague who took out a loan on his life insurance policy a few years ago recently received a letter from the company. That loan, like most life insurance policy loans, came with a much lower interest rate than he could get anywhere else - in this case, 6 percent. Also, like most life insurance loans, he does not have to make any payments on the loan principal until he wants to. He does make interest payments , and these are added to his semiannual premium bills.
While rates in the 5 or 6 percent range and the delayed principal payments make policy loans very attractive to people who either need the money for a specific purpose or want to invest it at 10 percent or better, the insurance companies would like to get back some of the principal in these outstanding loans.
In this case, the company hopes to bring in the money by offering to change the interest rate on the $1,500 of loan balance from 6 percent to 14.13 percent. In return for having interest payments jump from about $90 a year to over $210, the company will increase his dividend each year, so that at the end of 10 years he will have $118 more in dividends and after 20 years, $228 more. Also, the cash value of the policy and the death benefit will both be about $6,400 more in the year 2005.
The letter does say the offer is voluntary, but it does not mention that the extra money sent in will, in the first year at least, earn a rate of return of just 8 percent. We had to make a phone call to find this out. The rate will probably change over time, but for now, it is at least two percentage points less than the customer could earn by putting the money in a money market fund.
Although the letter was accompanied by a signature form indicating acceptance of the offer - a form that included the line ''This amendment may not be canceled'' - it did not contain this important rate-of-return information, nor did it specifically tell the customer what the new annual interest payments would be. It would be helpful if insurance companies would include this information. Failing that, you need to ask.
The second example comes from a newspaper advertisement for a Florida banking company. Banks and savings-and-loans have attracted billions of dollars in high-yielding deposits through money market deposit accounts and more liberal certificates of deposit. To help pay those high rates, banks and S&Ls would like to lend out as much money as possible.
The ad from this particular bank seeks to accomplish this by headlining a ''come on'' rate of 11.99 percent, although it does clearly state that the low rate is guaranteed for only six months. What happens after that? Later in the copy we're told: ''Following the introductory period, your interest rate will be determined by the 26-week T-Bill or the Prime Rate ... you choose your index.''
But what does ''determined by'' mean? Another phone call reveals that the customer would be charged 51/4 percent more than the Treasury-bill rate (currently 10.4 percent) and 3.15 percent over the prime rate (123/4 to 13 percent). The ad also does not mention, however, that if you borrow less than $ 25,000 you cannot ''choose your index''; you can only use the prime.
The missing information might have been revealed eventually, but consumers should be able to make informed decisions and comparisons before they send in coupons and applications. As long as some financial institutions can make more money with partial information than they can with full information, it is left up to consumers to ask questions and expect firm answers.
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