Penny Auctions: You Have to Pay to Bid With No Guarantees

Penny auctions might be a fun way to try to get big-ticket items at reduced prices.

But in many ways, a penny auction is more like a lottery than a traditional online auction.

In a penny auction, you have to pay to bid. Before you know it, you could spend far more than you intended, with no guarantee that you'll get anything in return.

How Does a Penny Auction Work?

In a penny auction, the site owner posts items and you pay to bid for them. Unlike a traditional auction, where only the winner pays, penny auctions require you to pay before – and as – you bid, win or lose.

You may have to pay a fee just to register for the site, and sometimes, it’s substantial. Then you have to buy a "bid package." For example, you may buy 100 bids for $50. Additional bids cost more money, often between 50 cents and a dollar per bid.

The price of auction items usually starts at zero, and each bid bumps the price of the item up a penny. Each bid also adds time – from 10 seconds to 2 minutes – to a countdown clock. The goal is to be the high bidder when the clock runs out. But because the clock resets with each bid, the auction process can be unpredictable and take time to complete.

What Does 'Winning' Mean?

Winning the auction doesn't mean you've won the auction item: It means you've won the right to buy the item at the final price. For example, your $50 winning bid for a camera might seem like a bargain, but if you placed 200 bids that cost $1 each, your cost will actually be $250 – plus shipping and handling, and possibly a transaction fee.

If you lose an auction, chances are you've lost your money. If you placed 199 bids on that camera, for example, you'd be out $199. Some penny auction sites have a "Buy It Now" feature that lets losing bidders buy the item at retail price and apply the amount they spent on bids as a discount. So you might not lose your investment in the bids you purchased, but you wouldn't save any money off the retail price, either.

Bogus Bidders: Bots and Shills

Some dishonest auction sites use bid bots, which are computer programs that automatically bid on behalf of the website. And some fraudulent sites achieve the same effect using human shills. You may be seconds away from winning an auction when another user places a bid. That keeps the clock ticking, and forces you into a bidding war to stay in first place. Though the bidder appears to be another user, it may be a shill, or a bot programmed by the website to extend the auction and keep people bidding (and spending money) as they chase the "win."

Penny Auction Pitfalls

Penny auctions may offer deals, but they also can present problems:

• Time lags. How soon do you need the item you're bidding on? Can you tolerate it being delivered late or not being delivered at all? Many complaints about penny auctions involve late shipments, no shipments or shipments of products that aren't the same quality as advertised.
• Misleading terms. Terms like "bonus bids" might suggest that bids are free. In a penny auction, you pay for every bid.
• Hidden costs. Read each penny auction site's Terms of Use before you sign in or register. Sites may charge fees (for membership, ongoing subscriptions or shipping), follow different rules, or have a variety of refund policies or other terms and conditions. If the terms and conditions aren’t clearly disclosed on the website, take your business someplace else.
• Insecure payment options. Consider how you'll pay. Do you have any recourse if something goes wrong? Don't send cash or use a money transfer service. Instead, consider using a credit card. That way, if something goes awry – say, you don't get your merchandise or it's not what you expected – you can dispute the charge with your credit card issuer.
• Phishing trips. If you get a message that looks like it comes from an auction website or payment service and it asks for your password or financial information, hit delete. They're phishing for your information so they could use it to commit fraud.
• Reputation rules. Avoid doing business with sellers you can't identify. Check out any penny auction site by entering its name in a search engine online. Read about other people's experiences before you commit any money.
• Hello? Anyone there? Look for a phone number and call it to confirm that you can contact the seller in case you have questions or problems.
• You're about to spend some money. Know exactly what you're bidding on. Read the seller's description of the product closely, especially the fine print, and keep a copy. Save copies of all emails between you and the auction site, too.

Report Problems With Online Auctions

If you have problems during an online auction transaction, try to work them out directly with the website operator. If that doesn't work, file a complaint with the Federal Trade Commission and your state attorney general.