2 Things You Can Finance, but Never Should

By Markets Fool.com

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Household debt is currently 80% of the GDP -- and rising.One of the biggest contributors to this continued trend of indebtedness is the unnecessary use of consumer credit. That's not to say that the ability to borrow funds isn't useful, but there are certain purchases that you absolutely should not go into debt for.

Household items

Zero-percent interest offers are a common sales tactic used by retailers of furniture, electronics, and appliances. You usually get them through in-house financing or the store's branded charge card, and because the items serve as collateral on the debt, it's pretty easy to qualify for a few thousand dollars in credit.

Retailers often claim anywhere from 90 days to 18 months "same as cash" if you go with their financing, but that's not how it actually works out. Stores inflate the base price of financed household goods to offset the risk of default. This means you'll pay more for your purchases than you would with cash, even before interest kicks in.

In addition, the loans are often set up so that the minimum due every month doesn't actually pay off the balance before the promotional interest period expires. Once it's over, you'll find yourself facing rates that can top 25%. Even worse, the interest that would have accrued without a 0% interest rate is deferred until the promotional period ends. This means that you become responsible for every cent of interest you would have paid from the start, regardless of your current balance. Failing to make the minimum payment on time will also result in a rate hike on all deferred interest due.

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Outside of in-store financing, some of the best examples of bad debt deals are the classes of vacuum cleaners that retail for upwards of $3,000 dollars. Rainbow, Kirby, and other high-end brands of machines are often sold door-to-door with "economical" financing options featuring a two- to four-year obligation attached to a 20%-plus interest rate that accrues on the entire balance, including the previous months' interest. You may only be paying $90 a month, but you end up paying $4,380 over the life of the loan. These products also lose value quickly, so even if you manage to sell the vacuum, it's nearly impossible to recoup most of the cost.

Frugal alternatives:Paying with cash is ideal. You're in a better position to negotiate, and you don't have to worry about that financing markup. If you don't mind secondhand items, returns, repossessions, refurbishments, and owner resales are available on Amazon, on eBay, and at pawn shops for dirt cheap.

If you have to take the financing route, however, it's a good idea to divide the balance by the number of months in the promotional period so you know the actual amount you'll have to pay each month in order to have your purchases totally paid off before the interest kicks in.

Tax bills

Very few things strike more fear in a person's heart than a big tax bill from the IRS. It may be tempting to make it all go away by putting the balance on a credit card, but that decision will almost certainly prove to be even costlier in the end. For starters, the IRS tacks on a 2% processing fee to credit card payments. Add in your card interest, and a large tax bill becomes an even larger credit card bill that can take years to pay off. Going this route can also kill your credit score, as your utilization, or the percentage of your credit limit that you're using, shoots up -- a red flag to creditors.

Frugal alternatives:Despite its uncompromising, Scrooge-like reputation, the IRS actually offers the most cost-effective options for big bills. Your first choice is to request a payment arrangement with the IRS that allows you to break the payment down into more manageable monthly chunks. Those who can pay in full a bit later in the year can also ask to have the due date deferred, giving you extra time to take care of it. If paying the full balance will cause a considerable hardship, you may be able to receive an Offer in Compromise, decreasing the amount you owe. Keep in mind that no matter which of these options you choose, late-payment penalties still accrue at 0.25% to 1% every month, as does a small interest rate (3% plus the federal short-term rate, which is updated quarterly and is currently 0.51%) until the balance is paid. Even still, the government's rates are substantially lower than credit card companies', which average 16%.

Some debt may be unavoidable, but it's never wise to take it on unnecessarily. Even if your income can cover the costs, you should think twice before you put your expenses on credit. As always, cash is king.

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Lauren Treadwell has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.