January 14, 2015 – By Geoff Williams
You don’t have to play the lottery or go to Vegas to lose your shirt. Consumers make risky bets with their money all the time. In fact, you may be a gambler and not even know it. Here are just a few ways you may be playing a game of chance with your money.
Deferred-interest Payment Plans
You’re probably familiar with this deal: You buy carpet, furniture or another product on a store credit card, and you owe no interest if you pay the item off within a certain period – often six to 12 months. Medical credit cards often offer these deals, too.
But deferred-interest plans can be a gamble. You’re betting you can make all of your payments before the time is up – and if you don’t, you will lose money. Maybe a lot.
Katie Ross, education and development manager at American Consumer Credit Counseling, explains the financial damage you can do with a deferred-interest payment plan this way: “If you made a purchase of $1,000, and you needed to pay off the balance within a 12-month period, and you missed a payment or didn’t pay in full within the 12-month period, depending on the [annual percentage rate], you would be charged retroactively for all 12 months.”
Credit Card Cash Advances
It’s rarely a good idea to take a cash advance from a credit card. The interest is usually higher than it would be if you purchased something for the same amount with your card, and it begins to accrue immediately. You’ll probably also be socked with a transaction fee, which may be as much as 5 percent of the cash advance. So if you take a $1,000 cash advance, you may pay a $50 fee on top of the interest. Essentially, you’re betting that the upfront cash is worth the expense and that you’ll be able to pay your credit card company back quickly.
Putting Off Repairs
It’s understandable to put off repairs because you simply can’t afford to get something fixed, but depending on the repair, you might be taking a huge gamble. That’s because delaying repairs for too long can mean financial devastation later. Consider your car, for instance, which is probably the second-most expensive item you own, aside from your house.
Jack Nerad, executive editorial director of Kelley Blue Book, says when consumers put off auto repairs, “the results can be disastrous.” He cites an example of not paying to replace a hose in your car. “A blown coolant hose is quick way to find yourself stranded by the side of the road. At best, you’re looking at an expensive tow. At worst, your overheated engine might be severely damaged and need to be replaced at a cost of several thousand dollars,” he says.
Dean Bennett, a residential designer and contractor in Castle Rock, Colorado, sees similar results with homes. Plumbing problems can be particularly devastating. Bennett says on a number of occasions, he has seen homeowners put off fixing a toilet that’s loose at the base, only to later have water damage. “So you end up paying to rip up the whole bathroom floor, and maybe part of the ceiling below, to install a new floor and to replace any furniture or other fixtures affected in the room,” he says.
When someone asks you if you want to buy a warranty, no matter what your answer is, you’re making a bet. If you purchase the warranty, you’re betting that down the road, your product will probably break. You reason that by spending some money now, you’ll save far more later. (This may beg the question: If you think the product probably will break, why buy it in the first place?)
If you decline the warranty, you’re betting the product won’t break, or that even if it does, you’ll be pleased you didn’t shell out the extra money for a warranty.
You’ll want to factor in the cost of the warranty, which is usually 10 to 20 percent of the purchase price, according to the Service Contract Industry Council. You could also hedge your bet and put the amount you would pay for a warranty into an emergency fund so you’re covered, or partially covered, if something goes wrong with your purchase.
As you likely know, the interest rate on a fixed-rate mortgage won’t change over the life of your loan. But with an adjustable-rate mortgage, it will change eventually because it’s tied into the cost of borrowing money. Borrowers like adjustable-rate mortgages because the monthly payments always start low, and if the economy is healthy, an ARM’s interest rate often remains low, too.
“Over the past few years, the gamble paid off really well for people who took out an adjustable-rate mortgage,” says Dan Smith, president of PrivatePlus Mortgage, based in Atlanta. “In general, these consumers were able to realize a rate that was lower than traditional fixed-rate mortgages, without a large increase.”
So as bets go, this may be a good one. But it’s still a gamble. In most cases, Smith says, an ARM will have a maximum cap of 5 percentage points. “There will be a cap on the increase for the first year, a cap on each of the years following and that lifetime cap. So a worst-case scenario, if a borrower started at 3 percent and was faced with the maximum increases, would be ending up at 8 percent,” Smith says. “Depending on the amount of the loan, that could translate to a significant difference in payment.”
For instance, if you buy a $200,000 home with a 3 percent interest rate, your monthly payment would be $843. If that 3 percent interest rate climbs to 8 percent, your monthly payment would rise to $1,468.
You could argue that an ARM loan is worth it because you’ll save more than you would with the fixed-rate mortgage – and what you save, you can invest for retirement. And what are the odds that your ARM will go up to 8 percent?
You may be right, but it’s also possible that you’ll lose your shirt. In fact, some of these gambles could cost far more than a bad night in Vegas. If you really want to gamble with your money, sometimes you might be better off going to a casino.