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The apps, sites, and services that can destroy your holidays and leave you in debt
The holidays are here, and the average American will spend nearly $900 on gifts this year. The desire to land a big ticket item while staying on a budget can lead to temptations like short term loans and penny auctions, both of which are made more accessible by apps and other tech shortcuts.
But beware; while these options promise up-front relief for your wallet, they may end up costing you in the long term.
Penny auctions have a cost
Now that we’re well beyond the onslaught of ads for Black Friday and Cyber Monday deals, you might catch sight of companies that promise to save you over 90 percent off the retail price on the hottest items of the season.
Penny auction sites like Quibids and Beezid disguise themselves as an eBay-like alternative for overstocked items—they’re hotbeds for too-good-to-be-true tech deals. Browse the homepage of any of these sites and you’ll see the latest devices being auctioned off for unbelievable prices: iPad Pro for under $8, MacBook Pro for less than $15.
Winning bids on items generally end up higher than that, as the auctions are extended with each additional bid, but even if the final value rises as high as half the retail price, it might seem as though it would be a significant amount of savings.
Rest assured, those prices aren’t what they seem. Penny auctions don’t operate the same as an eBay auction, where the losers simply walk away unscathed; instead, you pay for every bid you place.
“Since the bid amount goes up in very small increments, there will be a lot of bids (each of which incurs a charge) before you finally get a winning bid,” independent television producer John Z. Wetmore told the Daily Dot. “The amount you spend on accumulated bid charges can easily exceed the actual amount of the winning bid.”
Tom Brusehaver, a former penny auction user, gave us an idea of what a typical transaction looks like. “It may cost $25-30 to not win the bidding on a $100 item,” he said. Brusehaver called penny auctions a scam.
In the case of Quibids—one of the most popular of these sites despite a 1.1 star rating on Consumer Affairs and nearly 600 complaints logged to Better Business Bureau—each bid costs $0.60 to place. If you place 25 bids as the auction price climbs, you’re guaranteed to pay $15 regardless if you win. If you do win, you’re still on the hook for the price of the winning bid plus the cost of each individual bids. That means if you win the auction with a $50 bid, you’re actually paying $65—the cost of the final bid plus every bid you placed over the course of the auction.
In some cases, like the now-defunct PennyBiddr, sites create artificially high prices through shill bidding, where a human or bot bidder acting in the interest of the seller places bids to extend the auction and force additional bidding.
Some sites provide a “Buy Now” option that lets you place the amount you spent on bids toward purchasing the item at its suggested retail price. While this ensures that the money spent just trying to win the item doesn’t go entirely to waste—and lets the sites rake in even more money, despite already achieving up to 300 percent profit margins according research from Cornell University—it still doesn’t present a great value for the buyer; Consumer Reports noted in its research that it found the “Buy Now” price to be “typically higher than those on Amazon and other retailers.”
According a spokesperson at the consumer dispute site PeopleClaim, several people have placed complaints about damaged products received from penny auction sites. Others have reported receiving knock-off products and devices other than what they were led to believe they would receive. Other sites like Wavee have been shut down for failure to deliver items won in auctions.
Just wait for payday
While auctions require a significant time investment, most sales during the holiday season are the opposite—blink and they’re gone. That’s the catch to most doorbuster deals that pop up during this time of year; supplies are limited so you need the cash on hand.
This presents a difficult situation for anyone living paycheck to paycheck (44 percent of Americans, according to the Corporation for Enterprise Development) or who are strapped for cash when the shopping season is in full swing. Last year, nearly $40 billion was lent out in the United Kingdom by short term loan companies, with more than one-in-four people spending more than they can reasonably afford.
Many people know the risks of payday loans—the short-term, high-interest advances on cash—but as with many shady industries that generate exorbitant amounts of profit, the tech industry has found a way to repackage the product to make it seem legitimate.
Priyanka Prakash, a loan specialist and analyst at FitBizLoans, told the Daily Dot that alternative lenders often provide loans to borrowers with lower credit scores. “They provide loans to people who simply can’t afford to wait the one-to-three months it takes to get a personal or business loan from a bank. With an alternative lender, you can get money in as little as one business day,” she said.
These types of services can often be no better than payday loan stores with a mobile-friendly face so you want watch your interest climb in an app instead of getting calls from debt collectors. Prakash said that’s because these lenders, “provide money to subprime borrowers and focus on speed as a convenience, they charge a premium.” She described the annual percentage rate (APR) as often being high, which may be a bit of an understatement.
In the case of ZestFinance, a lender that relies heavily on data from the loan seeker, APR can go as high as 390 percent. The Washington Post reported that, “the borrower pays $400 in interest for a six-month $600 loan.” LendUp, another Web-based alternative lender, offers small sums with an APR of 145 percent.
These are figures that aren’t quite as bad as the worst of the predatory payday lenders—but aren’t better than the best of them, either. The real value for online lenders isn’t necessarily just the cash extracted from customers, but the data that comes along with it. By taking a high-interest loan from one of these companies you’re granting them the right access information that will allow them to optimize what they charge so they can milk every last available penny from you and others in a similar situation.
By comparison, local banks and credit unions generally offer small loans at considerably lower rates—around 18 percent APR on average.
Holiday debts are bad enough for most people; according to a NerdWallet analysis, it took over two and a half months for middle-income Americans to pay off holiday credit card debts in 2014. There’s no need to make those figures worse by strapping an insane interest rate to it. It defeats the whole purpose of the big savings up front when you’re stuck still paying it back—plus interest—in April.
Think beyond the holidays
Usually when we think about technology during the holidays, we’re dreaming of the devices we’d like to unwrap. Penny auctions and online lenders are much more likely to gift you a lump of coal than any of the items on your wish list.
These businesses utilize the Uber model of disruption; they’re slightly more convenient and slightly cheaper versions of an existing service that is just marginally better. Unlike Uber, engaging with one of these companies can have long-lasting and detrimental effects.
The holiday season isn’t predicated on scoring the biggest or the best gift or spending the most money possible on a person; it’ about making memories with the ones you love. Those memories are going to be bad ones if you spend your time shopping with these legalized scammers.
Photo via Freepicturesofmoney/Flickr (CC BY 2.0)
AJ Dellinger is a seasoned technology writer whose work has appeared in Digital Trends, International Business Times, and Newsweek. In 2018, he joined Gizmodo as the nights and weekend editor.