Dave Ramsey is absolutely right about this type of borrowing
Dave Ramsey advised against taking on most types of debt, even suggesting avoiding a mortgage when possible and paying cash for a home.
In some cases, Ramsey’s anti-borrowing stance could potentially lead you astray, leaving you with less wealth. For example, giving up credit card rewards and not building your credit score could mean giving up valuable perks and making your financial life more difficult.
But, there’s one type of loan that Ramsey suggests avoiding – and one he’s absolutely right about. Here is what it is.
You absolutely must avoid this kind of loan that Ramsey warns against
On the Ramsey Solutions blog, there’s a clear warning about a particular type of loan you might be offered but should say no to. It is an installment loan or a loan to buy now and pay later.
Typically, these loans give you the flexibility to purchase an item by making several small payments over time. The example given on Ramsey’s blog is shoes that are for sale if you make four payments of $19.50.
Buy-it-now, pay-later plans have been around in the retail world for a long time, and Ramsey says there are now digital installment loans offered by online stores. Many promise you can make a few different payments over a short period of time, like four or six weeks, and not pay interest on the amount you’ve borrowed. And, in some cases, no minimum purchase is required, so even small payments can be financed with installment loans.
Here’s why you should avoid installment loans
Ramsey explains several key reasons why you should avoid financing purchases using buy now, pay later loans.
First and foremost, he warns that many come with very high late fees. These fees can represent a large percentage of the amount borrowed, and many consumers end up getting stuck paying them because they forget or can’t afford to send their money on time.
Ramsey also says that while some loans promise no interest, others charge high rates, especially if you take longer than expected to pay off your debt. And he explains that some services charge other fees, like charging a cost to reschedule payments or charging a convenience fee for each payment you make.
And, he goes on to explain that even if you make your payments on time and avoid unexpected fees, you probably still won’t want to take out this type of loan because it “numbs you to the reality of how much you’re really spending.” By breaking down large purchases into small monthly payments, items appear affordable even though they are not, and you hide the full opportunity cost of this type of purchase.
These are all really valid reasons to avoid installment payment plans. If you are considering financing a purchase this way, you should think twice because you could soon find yourself in financial difficulty and really regret your choice. Instead, if you can’t afford to buy an item in advance, it’s best to wait until you can so you don’t risk owing interest or late fees. or incur future income to make payments for an item that was out of your starting price range.
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