If it sounds too good to be true…
You’ve probably heard that cautionary phrase so many times you can finish it yourself … “it probably is.”.
That may be because it offers a safe way to approach the world and stay out of trouble.
Now, with the holidays upon us, it’s probably a phrase you’ll want to keep top of mind, especially when you’re confronted with these “opportunities” retailers and lenders may throw your way:
I may be dating myself, but there was some beauty to the old layaway plans that allowed you to reserve your purchase – a couch, tv, kitchen appliance – with a down payment and then pick it up after you had finished paying it off. That approach made it difficult to spend what you didn’t have. With BNPL, missing your agreed upon payments can be a financially punishing experience. Substantial late fees and interest rates that would make a credit card blush, to start. Add the potential to see your account slide into collections and you should probably take a pass on this “deal” or, at the very least, read the fine print.
Here’s another great way to buy that gift you haven’t yet fully saved for, right? Wrong. Sure, if your savings is almost there this could be a useful option. But if it’s just a means to make a purchase you’ve got no business making, the consequences could be dire. Accumulated finance charges, double-digit interest rates and a payment that doesn’t fit in your budget can quickly douse your holiday spirit.
Have you ever asked yourself, “How can they do that?” Chances are you’re giving up something in exchange. Are you now paying more for the goods or service? You’ll also want to consider what happens if you miss a payment. Imagine missing payment number 29 and getting hit with hundreds or thousands of dollars in “back interest.” So much for interest free.
It seems like a generous offer your lender might make to get you through the holidays. But again, at what cost? Spending what you don’t have and piling up additional interest or adding payments to the back end of your loan probably isn’t a good idea. Instead, give yourself a gift by making that payment.
Don’t do it. First, it will likely cause your credit score to drop. And second, you’ll now have more credit cards — and more temptation to use them. What’s worse, you could forget you did it and months later end up wondering why your credit score plummeted. (Yes, I did that…but only once!). Opt for a cash spending spree instead and taking a pass on the “savings.”
Are these options always too good to be true? I can’t say for certain, but I do know they come with the potential for danger.
So, this year make sure you look before you leap – into trouble.
About the Author: JJ Montanaro is a Certified Financial Planner® professional and part of the Military Affairs team at USAA. He’s a graduate of the U.S. Military Academy and has over 20 years of financial planning experience.
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