Before you jump at what looks like a good deal, here are six cases that might make you reconsider.
1. Leasing a car
The main benefit of leasing a car is getting to drive the newest models. If that doesn’t set off alarms about why leasing is a bad deal, there are more downsides to consider, too.
Leasing a car means you’re paying to use a car that you don’t actually own. Even though you don’t own it, you’re still responsible for making repairs. You’ll also be responsible for any extra wear and tear as well as paying for additional miles if you exceed the limit in your lease agreement.
Yes, you can purchase the car at the end, but you likely won’t get as good of a deal as you would have if you had bought it in the beginning.
Unless your math proves otherwise, stick with traditional car purchasing for the best deal on your wheels.
2. Credit card rewards
Credit card rewards seems like a good deal, but you’ll have to keep from making any mistakes or you’ll risk losing money.
Getting 2% cash back for using your credit card might sound like a nice bonus, but it really amounts to just $20 for every $1,000 you spend. Miss a payment or run a balance just once, and you might lose all the value of credit card rewards or more.
Late payment fees range from $25 to $35 per offense, which can easily wipe out the value of credit card rewards. Interest rates average about 14% but can climb to 30% if you’re penalized for making late payments.
If you’re a responsible credit card user, proceed with caution with credit card rewards. But if you run a balance, don’t even think about rewards. Any benefits will likely be canceled out by interest payments.
Instead, focus on paying off your debt by considering transferring balances to credit cards with lower interest rates or even consider peer-to-peer lending to pay off your credit card with lower interest rates.
3. Home mortgage tax deduction
Homeowners celebrate the home mortgage tax deduction. But in reality, you’re getting back just a fraction of the interest that you pay each year.
Dave Ramsey offers a simple example for why this isn’t a great deal:
If you have a $200,000 house at 5% interest, you paid $10,000 in interest. You can take a tax write-off on $10,000 if you pay out $10,000 to the bank. If you make $70,000 a year, you’re in a 25% tax bracket. If you don’t pay $10,000 on taxes, that saves you 25% of $10,000 — or $2,500. So here’s your tax write-off: You send Countrywide Mortgage $10,000 to keep from sending the government $2,500. Bad idea.
Instead, consider renting when it makes sense or just concentrate on paying off your mortgage.
There are other ways to get the equal tax deductions, too. Ramsey points out that you could just donate that $2,500 to a charity of your choice each year instead of paying $10,000 to your bank.
4. 0% financing
Financing purchases at 0% interest is how some pay for home improvement, electronics, or other stuff that they can’t afford now but want to buy now and pay later. The trouble starts when they get in over their head and can’t pay it back later.
Many offers, which often involve opening a new credit card, have huge interest penalties if you don’t pay them back on time. Lowe’s charges 24.99% if you don’t pay off your 0% purchase entirely within six months. Apple’s financing option costs 22.99% if you fail to pay your balance in time.
Instead of financing your purchases, save up first. There’s no harm in waiting, and if it’s truly an emergency, dip into dedicated savings to pay for it.
5. Going-out-of-business sales
You’ve probably seen the big signs advertising amazing deals like “Up to 80% off” at retailers that are going out of business. But that doesn’t mean you’ll save that much, and you might actually end up paying more.
When liquidation companies take over, they might raise prices and then discount them to make it seem like a deal. In reality prices may still be higher than they were before the going-out-of-business sale started.
The merchandise might not be all that it seems, either. What’s for sale might actually be previously-opened and returned merchandise. If you discover later there’s a problem, you might be out of luck, as there’s often a strict no-return policy with liquidation sales.
Needless to say, buyer beware.
6. Extended warranties
If you’re looking for peace of mind, extended warranties might not cover everything you think and can cost you a bundle. Businesses are all in the game to make money, so they wouldn’t offer extended warranties if they weren’t profitable. That should be enough to signal that they might not be such a good deal.
With extended warranties, it’s often unlikely you’ll need the repairs you’re protecting against. If problems do come, you’ll have to read the terms of the agreement carefully to see what’s covered.
Don’t forget that items like electronics depreciate quickly, and buying new might be a better deal than the paying for the extended warranty anyway.