Three awful money products to avoid in 2012

Avoid these three naff deals and your money will be much healthier!

Financial products come in all sorts of different shapes, sizes and forms. They may be investments, insurance, a type of loan, or somewhere to keep your cash safe.The problem with the worst of them is you can always find a few people for whom they could be useful.

If a product was shown to have no benefits for anyone, ever, only negatives, it would be banned. But with a whiff of possible benefits for three people, they aren't. Having managed not to get banned, many of these products are then oversold.

An independent financial adviser must ask lots of questions and fill in forms, and generally assess your suitability based on your psychology and needs before being allowed to sell you a £100pm pension plan.

Yet people who have little money, or no understanding of money, or who have had money problems can get products within minutes with no tests of suitability. Since money problems and poor financial education will continue to be the biggest theme in the UK, I'll look at three potentially affecting those from this realm.

Here are the deals that I will not be recommending this coming year:

Misleading safety with shrinking savings

Triodos Bank's notice savings account pays 0.05% interest, or 0.1% interest if you save £5,000 or more. You have to give 33 days' notice before you can make a withdrawal, although if you opt for a year's notice you'll get 0.1% with just £2,500 of savings.

Triodos says of its notice accounts: “The more you save and the longer withdrawal notice you choose, the more interest you earn.”

I can't argue, but, at 0.05% interest on a £1,000 deposit, it would take a basic-rate taxpayer 60 years to earn a total of £24 interest. Due to inflation, your £1,024 will buy then what maybe £150 could buy you today! Your “safe” savings have been destroyed by rising prices. At 0.1%, it takes just 30 years to make your £24 interest. Fantastic. I can't wait.

Luckily, I don't have to. We can earn £24 or more in just one year. What's more, we can do it with an easy-access savings account, which means getting the money in days, not 33 days. The best currently pay around 3% before tax, or 30-60 times more interest than the Triodos Bank notice accounts!

If you're poor, why not pay more with a prepaid card?

The Kardashian Kard was a US prepaid card approved by the Kardashian sisters. However, they withdrew their names from it after legal advisers said the card “takes advantage of financially unsophisticated young people and was a terrible financial product”, writes an American firm of solicitors.

The problem was it had a complicated structure of fees that could stack up to $100pa.

Sadly, the Kardashians can't pull the plug on prepaid cards over here. Look at the Sterling Prepaid Mastercard, available to anyone 13 or over. It costs £10 merely for the honour of getting it, £6 per month in fees whenever money is on it, £5 per month dormancy fee from four months, £1.50 per withdrawal, and you pay £10 to get your money back when closing the account. You could easily pay £100 in a year.

Consider the free alternatives of basic-bank accounts with no overdraft facility, such as from Barclays or Co-operative.

Preying on the desperate with payday loans

Payday loans will give anyone a small loan to last until payday at a staggering interest rate. With the cheaper ones, you still might pay £30 to borrow £100 for a few weeks. Even Wonga costs a fortune, despite its recent advertising campaign.

Many question whether quoting the APRs of 300% and up to many thousands of percent are misleading, since those are annual rates and payday loans are supposed – in theory – to be used for just a few weeks only.

They're completely wrong and could do with a lesson from a maths teacher, but if it makes it easier for you, you're looking at around 1% per day or even far more, which compares to around 1% to 2% per month when paying standard credit-card rates.

Let's talk about credit cards. If the best loan you can get is a standard credit-card rate of 15%-20% APR (that's per year) rather than a deal, such as a 0% offer, you need money advice. There are no two ways about that. These are very high interest rates that are as likely to kill you as cure you.

So, if you can't even get that and have to resort to payday loans, which are many, many, many times more expensive still, then clearly you also need debt advice or at the very least money-management advice.

You need to look at your money strategy in detail to find the best route for you. A charity such as National Debtline or a debt officer at Citizens' Advice will help you with your money-management or debt strategy. You just need the balls to carry it out, and then you will be out of your miserable situation sooner and with less pain.

You also need to swallow your pride, bite the bullet, be brave, admit your money problems to friends and family and, until payday, live on bread and water, raid supermarket bins, and ask if soup kitchens (google “soup kitchen” plus your town) can  help you out. Then you need to severely cut your outgoings. It's hard for a time, but it'll be harder if you get caught in a debt trap, and that is extraordinarily easy with 1%+ interest per day.

One way to get on top of your money situation is to make use of lovemoney.com's MoneyTrack tool.

The number of horrific stories of payday loan experiences I have seen on the internet and press statements from debtors, debt advisers and from those who have previously worked for payday lenders is frightening but, at those interest rates, not at all surprising. I've not seen much like it in all my many thousands of hours of money research. Some debt advisers typically tell you never to borrow from or lend to friends and family, but, when it comes to a choice between loved ones and payday loans, I have seen that guidance rapidly dropped.

To ensure I've made my view clear: anything but payday loans.

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