Why Financing Can Be Disastrous for a Budget

People often use financing so that they can buy something that would otherwise be unaffordable, and usually at a small monthly payment. Even if there are no interest costs to consider, there are a couple of reasons why this could be bad for your budget.

First, because the payments are a small fraction of the purchase price, a person might be tempted into multiple financing options. The danger here is that these payments are locked in, likely for several years. Individually they may be small, but multiple purchases that are financed could quickly add up. Months or years down the road if there are adverse conditions that lead to a reduction in your income or an increase in your expenses thenthose financing payments could make it a lot harder for you to get by.

Secondly, it creates or reinforces a bad habit, which is purchasing something that you cannot afford today or otherwise wouldn’t buy. This is a habit that’s led to a lot of personal debt and why it’s easy to spiral out of control. Financing payments are meant to look small and attractive, and that appeal can make it easy for people to be swayed into making unaffordable purchases.

The smaller your budget is, the more prepared you’ll be for when times get tougher. By controlling your expenses you can save more and then use those savings to make purchases outright without the need for any financing. It may not be an appealing idea in the short term, but over the long term you could save yourself lots of stress by avoiding any financing agreements.