Rachel Cruze: Why 0% Interest Should Be Avoided at All Costs
When you’re shopping for a major home item or a vehicle, the store or dealership might say you can get financing with a 0% annual percentage rate. While the idea of borrowing money without interest can seem like a great deal, the promotion could apply just for a limited time before the lender charges a high rate, and other catches usually apply.
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In a recent YouTube video, the financial expert Rachel Cruze explained why you should never fall for this trick. Instead, learn how to handle paying for big purchases without debt.
What’s Wrong With 0% Interest Offers?
First, these offers could tempt you to make risky purchase decisions that harm your long-term finances, especially if you don’t consider that you’re still taking on debt.
“Similar to buy now, pay later deals, 0% interest loans are just another marketing tactic that car dealerships and furniture stores use to get people to consider buying whatever expensive item they don’t currently have the cash for,” Cruze explained. This can also encourage splurging on costly add-ons that seem more accessible with the financing deal.
Besides being saddled with debt payments for these expensive purchases, you might not actually save much money. For example, Cruze discussed how car dealerships often mark up the prices for less in-demand vehicles that qualify for 0% financing through the manufacturer. These loans also often have strict terms that can lead to costly surprises.
“So if you slip up on just one monthly payment, you’ll get hit with a new, extremely high interest rate plus other fees and penalties that you never saw coming,” said Cruze.
In a Ramsey Solutions blog post, Cruze wrote about how 0% interest offers could leave you with a higher monthly payment due to potentially shorter loan terms. This could strain your budget and increase the risk of defaulting on your new loan.
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What Cruze Recommends Instead
“What you can do is actually save a little bit of money every single month and work your way towards something that you’re buying, a big purchase, with cash,” Cruze advised.
This will require being patient and living more frugally. You might also need to reconsider the item you’re purchasing so that paying in cash is more realistic. For example, rather than buy a fancy new car, you might opt for a more affordable used one and trade your old car in to help with the cost.
Besides avoiding the pitfalls of debt, you could feel more in control of your finances by learning to save for the things you want. You can also apply that habit to goals like retirement and an emergency fund.
Can You Use 0% Financing Wisely?
If you need to make an emergency purchase, don’t forget to compare prices and avoid buying more than you urgently need. You might still decide on a 0% loan or credit card offer. Keep the pitfalls in mind, read the terms carefully and make sure you can budget for those monthly payments.
Then, pay off the balance as soon as you can — preferably, before any promotion ends.
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This article originally appeared on GOBankingRates.com: Rachel Cruze: Why 0% Interest Should Be Avoided at All Costs
