Some offers are really too good to be true.
- You may encounter various opportunities to finance your purchase with 0% interest over a period of time.
- Financial guru Dave Ramsey warns against this for several key reasons, including how it can lead to excessive spending.
It is not uncommon to finance large purchases and repay them over time. Let’s say you need a car, for example, and it costs $ 30,000. That’s a lot of money to empty from your savings account – if you have that much money to start with. Instead, you can decide that a car loan is a better or necessary way.
The disadvantage of financing purchases is, of course, interest. But this is not always the case. If you qualify for the 0% interest offer, you may be able to avoid paying extra money in the form of interest.
But while 0% funding may theoretically seem like a great option, financial expert Dave Ramsey warns that it’s not the best practice. In fact, it advises consumers to avoid zero-interest offers – even if they seem excellent.
Past 0% interest
Generally speaking, 0% funding is an option that is available to consumers for a limited time. Let’s say you are able to finance furniture with 0% interest. It is likely that this rate will apply for say only six months, a year or even two years.
But what happens if your purchase doesn’t pay off at the moment? You will usually get stuck from there really high interest rate. And then you can spend more than you expected.
For 0% interest bids, it often happens that if you do not repay the entire loan balance by the end of the introductory period, you will accrue interest whole Balance. So let’s say you get 0% financing to buy $ 10,000 worth of furniture, but that 0% runs out after a year and changes to a 15% interest rate. If you still owe $ 8,000 at that time, you will be charged 15% of the initial $ 10,000.
(To be clear, this doesn’t always happen. It depends on how your funding agreement is worded. But it’s an option you’ll have to prepare for.)
0% interest can lead to excessive spending
Another big problem with 0% funding? It might tempt you to spend money on things you really can’t afford. One thing is to buy a car and finance it, because you need a way to get to work and you don’t have the money to buy it right away.
But let’s say you have a house full of perfectly functional furniture and you are tempted to upgrade because you see a 0% financing offer. If you don’t have the money to buy new furniture, you really shouldn’t get any. Instead, you should wait until you have saved enough to cover the entire purchase.
Finally, keep in mind that in some cases, 0% financing means paying more for the item you are buying yourself. Let’s say you’ve been looking at a car with 0% funding for a while. It is likely, Ramsey warns, that you will pay a higher price for that vehicle.
At the end of the day, Ramsey wants consumers to remember that “nothing is free.” So the next time you’re tempted by a 0% financing offer, you may want to go the other way – or start saving on the item so you can buy it more easily.
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