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People end up in debt for many different reasons. Sometimes, people take out a personal loan or a car loan intentionally because they decide doing so is the best financial move for them. This can make sense if, for example, you are using a low-interest personal loan to refinance costlier debt or to pay for a big purchase over time.
In other situations, however, people sort of stumble into debt. And this can be dangerous because if you end up borrowing when you don’t intend to, this can make accomplishing future financial goals a lot more difficult.
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Dave Ramsey warns about this phenomenon, urging people to steer clear of “sneaky debt.” But, what exactly is sneaky debt? Here’s what you need to know.
This debt could creep up on you — and it could cost you
Ramsey refers to sneaky debt as “things you could pay cash for but you’re encouraged to finance instead.”
Some of the examples that he gives include installment plans or “anything a salesperson says you can take home today and pay off some other time.” For instance, if you are at a furniture store and are planning to just pay for your couch but the company encourages you to finance it instead, this would be a classic example of what Ramsey is warning about.
As Ramsey explained, salesmen often try to sell this type of debt aggressively — especially because they can make money on the financing charges. As a result, they’ll make promises that sound great. “They might use words like ‘blah blah days same as cash’ or ‘zero percent APR,'” Ramsey warned.
Unfortunately, these sales tactics are sometimes successful at convincing you to finance something you otherwise wouldn’t. And that’s why Ramsey says it is so sneaky — because “it feels like a normal way to pay. In the moment. But remember, debt is owing any money to anybody for any reason.”
Ramsey urges you to just say no to any type of sneaky debt because you will needlessly make your purchase more expensive in most cases — especially because there’s often fine print that leads to paying interest even when you were promised that wouldn’t happen. And, even if you don’t get stuck with surprise interest charges, you’re committing future income to paying for today’s purchases.
“If you take something home now that you’ve promised to pay for over time, that’s debt,” Ramsey stated clearly.
How you can steer clear of sneaky debt
The important thing to remember about this type of “sneaky” debt is that it may not seem like it will cost you if you’re promised you won’t have to pay financing charges. So, it may seem like there is no harm in just paying off your purchases over time. In fact, you may even think you’re making a smart financial move by not tying up your cash.
But, in reality, there is no reason to finance any assets that go down in value if you have the money to pay for them. Why take a chance of paying interest if things don’t go as planned, or make it harder to live within your means later?
You should just say no to taking out a loan that a salesman tries to sell you on, even if it sounds good at the time — and you should follow this basic “rule” with no exceptions. If you do that, you will never fall victim to sneaky debt and you won’t waste your hard-earned money because you get tricked into borrowing.
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