Why Financing a Purchase is A Bad Idea: High Interest Rates, Unforeseen Costs, Difficulty Paying Off the Balance, Negative Impact on Credit Score and Loss of Savings

Introduction

Financing a purchase is the act of taking out a loan to pay for an item or service. This option is often used when someone cannot afford to pay the full price of an item upfront. While it may seem like an attractive option, there are many drawbacks to consider before committing to financing a purchase. In this article, we will explore why financing a purchase is a bad idea.

High Interest Rates

One of the main reasons why financing a purchase is a bad idea is because of the high interest rates associated with it. Most financing plans come with varying interest rates depending on the lender. These interest rates can range from 5% to 30%, and can cause a person’s financial strain to worsen over time. According to a study by the Federal Reserve, “The average annual percentage rate (APR) on a credit card is currently around 17%.”

Fortunately, there are low-interest alternatives to financing a purchase. For example, store credit cards often offer 0% APR for a certain period of time. Additionally, some banks offer personal loans with competitive interest rates. Taking advantage of these options can help save money in the long run.

Unforeseen Costs

Another reason why financing a purchase is a bad idea is because of unforeseen costs. Many financing plans come with additional fees such as processing fees, origination fees, late payment fees, and more. These fees can add up quickly and make it difficult for someone to pay off the balance. According to a report by the Consumer Financial Protection Bureau, “Consumers should be aware that financing plans may come with hidden costs or fees that can make them more expensive than they initially appear.”

To avoid unforeseen costs, it is important to read through all of the terms and conditions before signing a financing agreement. Additionally, it is important to keep track of payments and stay up to date on any changes to the terms. This will ensure that the borrower is not surprised by any unexpected fees.

Difficulty Paying Off the Balance

Financing a purchase can also make it difficult to pay off the balance. When a person takes out a loan, they are obligated to make regular payments until the balance is paid off. If a person misses a payment or is late on a payment, they may be charged additional fees or their interest rate may increase. According to a survey conducted by Experian, “Up to 35% of Americans have experienced difficulties paying off their debt.”

When dealing with financial obligations, it is important to create a budget and stick to it. It is also important to prioritize payments and make sure that the most important bills are paid first. Additionally, it is important to take advantage of any payment assistance programs or debt consolidation services that may be available.

Negative Impact on Credit Score

Financing a purchase can also have a negative impact on a person’s credit score. Missed or late payments can lead to a decrease in credit score and make it more difficult for a person to get approved for loans. According to a report by FICO, “35% of your FICO score is based on your payment history.”

To avoid a decrease in credit score, it is important to make timely payments and stay on top of any changes to the terms of the financing agreement. Additionally, it is important to check credit reports regularly to ensure that all information is accurate.

Loss of Savings

Finally, financing a purchase can also lead to a loss of savings. When a person takes out a loan, they may be tempted to use the money that could have been put into savings to cover the cost of the loan. This can leave them vulnerable in the event of an emergency or job loss. According to a survey conducted by Bankrate, “Nearly half of Americans have less than $500 saved for an emergency.”

Saving money is one of the best ways to prepare for the future. It is important to set aside money each month in a savings account to ensure that there is enough money to cover unexpected expenses. Additionally, it is important to invest in a retirement plan to ensure that there is enough money to live comfortably after retirement.

Conclusion

Financing a purchase can be a costly decision due to high interest rates, unforeseen costs, difficulty paying off the balance, negative impact on credit score and loss of savings. Before taking out a loan, it is important to consider the potential risks and weigh them against the benefits. Low-interest alternatives such as store credit cards or personal loans should also be considered.