Clark Howard

Is Borrowing Money With Affordable Payments To Buy Nice Things Really So Bad?

No one likes the real-life version of the boy who cried wolf.

For example, say you’re training for a marathon and get injured. Your doctor knows you can start training again in two weeks but tells you to wait four weeks just to be safe. Not cool, right?

It’s that sort of “eat your vegetables” talk that can be tough if it’s overly conservative. Most people understand that sometimes we need spinach instead of ice cream. But we don’t like people telling us to stay away from ice cream longer than is needed.

It’s fair to go through life with a healthy level of skepticism — although it’s also fair to trust people who have more experience and knowledge in a specific area than you do.

When it comes to money, many people wonder if the “eat your vegetables” advice is real. Or if it’s overly cautious. That can be especially true when we’re becoming independent as teenagers or young adults, and the financial advice is coming from our parents.

After all, being financially healthy is important. But not necessarily at any cost.

When does it make sense to borrow money to buy something that you can’t afford to pay for outright? And how damaging is it to do that?

What Are the Consequences of Borrowing Money To Buy Nice Things?

What are the real, negative consequences of going into debt to buy nice things? And just how serious are those consequences?

That’s what a Clark Howard podcast listener recently asked.

Asked Jennifer in South Carolina: "My college-age daughter wants to know why borrowing money and making payments that you can afford is so bad. She sees it as a way to get nice things. She wants to know why she should wait when she can enjoy those nice things now.

"We are a family that avoids all debt. I have always taught my kids that debt is 'bad.' However, I really struggled with an answer that she could relate to. Please help! She is about to graduate college and will be on her own soon."

Some of Clark’s explanation involves the simple idea of delayed gratification.

“When you borrow money, you’re paying an average of 21% interest. And so if instead you save money until you can afford to pay for something, you’re buying it much cheaper,” Clark says.

“Nobody ever got rich paying Visa or Mastercard 21% interest. In fact, you end up poor. You end up with less buying power.

“She likes things. She can have more things if she takes her time and pays cash for them. Because then she’s not paying the toll that’s put up and the interest you have to pay to the credit card company.”

Looking Closer at the Math: Is Borrowing Money Bad?

Let’s look deeper at how much borrowing actually costs you.

If something is $10,000, and you’re paying a 21% premium, it’s now a $12,100 purchase. That’s significantly more expensive. But for some people, depending on the item, it may seem worthwhile.

However, if you repay $200 a month to that credit card, it will take you 120 months — 10 years (!) — to pay off that charge. You'll eventually pay $13,991.80 in interest alone according to the Credit Karma debt repayment calculator.

Of course, that’s an extreme example. There are better scenarios than borrowing $10,000 on a high-interest credit card and making such small monthly payments that it takes 10 years to pay off.

But let’s consider investing that same $10,000. If you’re 20 years old, you may not be withdrawing that money in retirement for another five decades.

Even at a 6% annual return with zero additional contribution, that $10,000 will be worth $184,201.54 in 50 years.

When you consider the opportunity cost, that used car or wild European vacation that seems so worth it now could prevent you from nearly $200,000 in retirement.

Buy Now, Pay Later: Why It’s (Often) Not As Great as It Sounds

Another recent trend in borrowing that Clark views as a slippery slope is Pay in 4, otherwise known as Buy Now, Pay Later (BNPL).

Whether you’re shopping in person at a physical store or buying something online, you now have a preponderance of options to finance your purchase via BNPL.

Typically this means paying for 25% of the item upfront. And then making three other equal payments in the weeks or months to come.

As long as you make all your payments on time, you often don’t have to pay a cent in interest. And if you’re tight on cash, it can help with cash flow. Sounds ideal, right? Especially since you can walk out of a store with a $1,000 item for just $250 — and no interest owed!

Not so fast, Clark says.

“If she’s gotten into this whole Pay in 4 thing, and she feels like, ‘Well, I’m not paying any interest, mom!’ Ha,” Clark says.

“What happens is so many people who do Pay in 4 can’t get the payments done in 4. They don’t get them paid on time. They mess up their credit if they report to a bureau and may start dealing with a debt collector. And there are fines and penalties and all the rest that are equivalent to interest.”

Final Thoughts

Borrowing money to make a purchase isn’t the end of the world. Most people do that for homes and vehicles.

But the more you can deprive yourself early, the more you’ll be able to afford later. And the same can be true in reverse.

“I think the real way you can take the values you’ve tried to instill in your kids, if she’s not hearing that message, instead what you say, ‘Well, you like things. You can have more things if you save for them first. Because you don’t have the expense involved with the borrowing.’ That would be how I’d explain it,” Clark says.

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