Why Dave Ramsey says 0% funding is a scam

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Some offers really are too good to be true.


Important points

  • You may come across a variety of ways to finance a purchase at 0% interest for a period of time.
  • Financial guru Dave Ramsey warns against this for a few important reasons, including because it can lead to overspending.

It is not uncommon for large purchases to be financed and paid off over time. For example, suppose you need a car and it costs $30,000. That’s a lot of money to empty your savings account — if you have that much cash at all. Instead, you may decide that a car loan is a better or necessary option.

The downside of financing purchases, of course, is that they must earn interest. But that’s not always the case. If you qualify for a 0% interest offer, you may be able to avoid paying extra money in interest.

But while 0% financing might seem like a great option in theory, financial expert Dave Ramsey warns that in practice it’s not the best. In fact, he advises consumers to stay away from 0% interest deals — even if they seem like an excellent deal.

The trap of 0% interest

In general, 0% financing is an option made available to consumers for a limited period of time. Suppose you can finance furniture at 0% interest. Probably this rate is only valid for six months, a year or even two years.

But what happens if your purchase hasn’t been paid for by that point? From there, you’re generally stuck with a Yes, really high interest rate. And you could end up spending more than expected.

You see, what often happens with 0% interest offers is that if you don’t pay off your entire loan balance by the end of your introductory period, you’ll accrue interest on yours entire Balance. So let’s say you get 0% financing for a $10,000 furniture purchase, but that 0% expires after a year and turns into a 15% interest rate. If you owe $8,000 at this point, you will be charged 15% on the initial $10,000.

(To be clear, this won’t always happen. It depends on how your funding agreement is worded. But it’s a possibility you need to prepare for.)

0% interest can lead to overspending

Another big problem with 0% financing? It might tempt you to spend money on things you really can’t afford. It’s one thing to buy a car and finance it because you need a commute to work and don’t have the money to buy one outright.

But let’s say you have a house full of perfectly working furniture and you’re tempted to upgrade when you see a 0% financing offer. If you don’t have money to buy new furniture, you really shouldn’t get one. Instead, you should wait until you’ve saved enough to fully cover that purchase.

Finally, note that in some cases, 0% financing means paying more for the item you are buying yourself. Suppose you are looking at a car with 0% financing for a certain period of time. Chances are, Ramsey warns, you’ll pay a higher price for this vehicle up front.

At the end of the day, Ramsey wants consumers to remember that “nothing comes for free.” So the next time you’re tempted by a 0% finance offer, you might want to run the other way – or start saving for the item in question so you can purchase it with greater peace of mind.

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