When it comes to borrowing money, there are good deals and there are bad deals, just like with any business transactions.
You have to be able to tell the difference between a good one and a bad one. A good borrowing agreement will save you money. A bad one could ruin you.
It’s just like if you went to the grocery store and saw a gallon of milk selling for $10. You could probably find a better deal than that, no? It’s especially important to get a good deal on a loan because the loan is going to be with you a lot longer than anything from the grocery store.
Barbara from Michigan bought a riding lawn mower at Home Depot. She financed the purchase with a payment plan that included a 90-day same-as-cash incentive, and she told me how no payments were required during those first 90 days, and so she wasn’t making any payments.
“I won’t have to start paying on that for a couple months,” she said with relief in her voice.
“What?” I cried. “Why aren’t you paying on it now?”
“Because there’s no payment required.”
Barbara had a good deal on her hands but she didn’t know it. Home Depot was giving her the riding mower she wanted without requiring any down payment. Nothing. She got to take home her riding mower without forking over a dime. And she had three months to pay for it in full without incurring any extra costs. That’s pretty good.
Instead, Barbara will incur finance charges of 10 percent when she finally begins paying on that mower. And here’s the kicker: The 10 percent interest charges will be retroactive to cover the first 90 days. She will end up paying far more than the $1,000 price on the mower’s tag. If she’d just saved up half that money, and paid the remaining $500 off over the three months they were giving her, she would have saved a bunch on the finance costs. And she would have avoided having another piddly little monthly payment to make for the next year or two.
“Barbara, you should pay as much as you can toward that balance before the interest charges kick in,” I told her. “If you can save money on the interest, do it. It’s the same lawn mower, whether you pay extra for interest or not.”
That’s why it’s important to understand how the business of borrowing and lending money works. There is nothing inherently bad about borrowing or having debt. Both are necessary sometimes and can be helpful. It’s the bad debt and the unnecessary debt you have to look out for. As I said, Barbara got a great deal. She was just squandering it.