People end up in debt for many different reasons. Sometimes people intentionally take out a personal loan or car loan because they decide it’s the best financial decision for them. This can be useful if, for example, you are using a low-interest personal loan to refinance more expensive debt or to pay for a large purchase over time.
In other situations, however, people somehow go into debt. And that can be dangerous, because if you end up borrowing money when you don’t intend to, it can make it that much harder to achieve your future financial goals.
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Dave Ramsey warns against this phenomenon, urging people to avoid “sneaky debt”. But what exactly is sneaky debt? Here’s what you need to know.
This debt could pile up on you – and it could cost you
Ramsey refers to sneaky debt as “things you could pay for with cash but are encouraged to finance instead.”
Some of the examples he gives include installment plans or “anything a salesperson says you can take home today and pay another time.” For example, if you’re in a furniture store and plan to only pay for your sofa but the company encourages you to finance it instead, that would be a classic example of what Ramsey warns.
As Ramsey explained, sellers often try to sell this type of debt aggressively, not least because they can make money on finance charges. As a result, they will make promises that sound good. “They might use words like ‘blah blah days like money’ or ‘zero percent APR’,” Ramsey warned.
Unfortunately, sometimes these sales tactics are successful in convincing you to fund something you wouldn’t otherwise. And that’s why Ramsey says it’s so sneaky – because “it feels like a normal way to pay. In the moment. But remember, debt is about owing anyone money for any reason.”
Ramsey urges you to say no to any kind of sneaky debt, because you’ll unnecessarily make your purchase more expensive in most cases – especially because there’s often fine print that leads to interest being paid even when you’re promised that would not happen. And, even if you don’t stuck with unexpected interest charges, you incur future income to pay for today’s purchases.
“If you take something home now that you promised to pay over time, it’s a debt,” Ramsey said clearly.
How to Avoid Sneaky Debt
The important thing to remember about this type of “sneaky” debt is that it may seem like it won’t cost you anything if you’re promised that you won’t have to pay finance charges. So, it might seem like there’s no harm in simply paying off your purchases over time. In fact, you may even think you’re making a smart financial move by not locking up your money.
But, in reality, there is no reason to finance assets that are losing value if you have the money to pay for them. Why take the risk of paying interest if things don’t go your way or making it harder to live within your means later on?
You just have to say no to a loan that a salesperson is trying to sell you, even if it sounds good at the time – and you have to follow this basic “rule” without exception. If you do this, you will never fall victim to sneaky debt and waste your hard-earned money because you are tricked into borrowing.
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