If you take a road trip across America, you will inevitably come across a variety of rent-to-own stores. This industry has been around as long as I remember, but knowing the costs of renting to own, I never walked into one myself until recently, when I visited the local Rent-A-Center a few blocks from home in Southern California. Within two minutes of walking in the door, the major costs and downsides of rent-to-own made themselves very apparent. Read on to learn the best and worst of rent to own and whether it makes sense for you.
How lease to own and rent to own works
Are you familiar with layaway? Layaway is a form of credit from retail stores where they put an item aside and you come in and make regular payments until you have paid enough to fully buy the item. At that point, you can take it home and own it free and clear.
Lease to own and rent to own stores and businesses offer a similar philosophy, except you get the item instantly and have to pay over time. In theory, this works similarly to other loans. Car loans, furniture loans, and even credit cards have many similarities to lease to own and rent to own, but there are some stark differences, notably the cost and the target customer.
Home loans, car loans, and credit cards require a credit check. The companies that issue them are selective on who they lend to, as they know the risks of getting paid back by low credit borrowers is slim. In rent to own, low credit borrowers are the target customer, similar to payday lending and title loan businesses.
In general, any business with a credit aspect that targets low income, low credit borrowers, charges very high rates to make up for the expected losses. Sometimes, this can be viewed as predatory lending. Let’s dig into the numbers and look at some objective pros and cons of leasing or renting to own.
Pro: You get what you want right away
Let’s say you want a new bed for your bedroom. Your bed is old and worn out, but you have not saved up enough for a replacement. A lease or rent to own store will give you the product right away, often on the same day. Rent-A-Center (RAC) even includes delivery and set-up if you pick up furniture at a local RAC store.
When I walked in to the local rent-to-own store, I saw everything ranging from small electronics like smartphones to larger ones like stereos and TVs. Furniture ranged from beds to couches. They had anything you might need to host a party, furnish a home, or just about anything else.
Con: You pay extra to get it right away
If you can get anything you need with just a small down payment, what’s the problem? The problem is the payments add up fast. Looking at my local RAC’s website, they have a variety of Ashley Furniture available for rent-to-own. But the cost is much more than just buying an item outright from Ashley Furniture directly.
Because the prices are easy to compare, let’s look at a TV and compare the prices between RAC and direct purchase from popular retailers. RAC tempts users to get the most expensive TVs first by putting them at the top of the list. Let’s look at this 65” Samsung TV, one that is probably too expensive for the typical RAC customer from the start:
RAC does not list prices freely on the website. They just show you things you might want and hope you will buy without checking around on price. Any RAC purchase can be bought today at the listed cash price (which is not easy to find), pay over 90 days interest and fee free, or pay over a longer time horizon with interest and fees. After entering your zip code or sharing your location, RAC offers a weekly price and cash price, but this is evidence that prices are not the same everywhere or fair for every customer.
This TV has a 90 days or cash price of $1,609.03 or requires 87 weekly payments of $41.99 per week for a total cost of $3,620.31. This is interest of $2,011.28, more interest than the total item cost if you paid cash! If payments were monthly, this would be a 26.7% APR, but it is a weekly payment. I typed the numbers into this weekly loan calculator, and found that the true interest rate is 1.12% per week or 58.37% APR. This is a terrible borrowing rate. Like payday loan bad! But knowing it costs more than 100% interest for 87 weeks, a little under two years, it isn’t a surprise to see such a high rate.
The exact same TV costs $1,299.99 at Best Buy, Samsung.com, and Target. It is $1,099.99 at BJ’s wholesale and $1,267.97 with free scheduled delivery from Amazon. That is an average of $300 to $400 less if you buy somewhere else without paying interest.
From the lowest price, $1,099.99, to the with interest price at RAC, the price difference for the exact same TV is $2,520.32. For that difference, you could buy three of the same TV somewhere else for the same price as one TV with rent-to-own interest at the rent to own store.
Pro: You have access to a variety of brand new items
Browsing the RAC website, I am impressed with the list of items they have for sale. Furniture, appliances, computers, electronics, smartphones, and other deals.
Just keep in mind, that you are paying a premium for these “deals.” An Xbox One S might seem cheap at $26.99 per week. A new 50” TV for the family and paired Xbox or PlayStation might seem like the perfect treat for your family at “only” $53.98 per month. But over time, you just might end up paying triple the price of buying it outright.
RAC does offer some benefits while you are paying, including the ability to pause payments and give the item back temporarily and repairs on items still in an active rent-to-own agreement. But that isn’t worth more than double the cost.
Con: You can lose the items or damage your credit if you don’t pay
The RAC website touts rent-to-own as a great alternative to credit cards. In some ways, they are spot on. With credit cards, you don’t get the ability to pause or return an item for financial reasons to stop your monthly payment. Once you swipe and pay with a credit card, it’s yours and you have to pay until the bill is paid off.
However, credit cards are an unsecured form of credit. If you stop paying, the credit card companies cannot repossess your items, they can only come after you for the money you owe on the account, plus interest, fees, and in some cases attorney and recovery fees. With lease to own or rent to own, the lessor can come repossess the item.
If you stop paying for a rent-to-own product, you lose the product plus every dollar you paid so far. That’s a bad deal no matter how you look at it.
The bottom line: Avoid rent to own if you can afford it
Like payday lending, the rent-to-own industry targets people with low incomes, bad credit, and little or no financial education. Anyone with a pocket calculator and a few minutes can figure out why rent-to-own is a bad deal financially.
In some cases when you really need something in a pinch, it may be worth the markup or high price to buy.
If you have no credit and can’t get an item elsewhere, you might look to a rent-to-own or lease-to-own option as an alternative. Before you do that, look at the item and how much you need it in the first place. No one “needs” a new TV. Few people “need” a new couch. Unless you work in the video game industry, no one needs any new game console or game system.
If you only buy what you actually need, you will probably find you don’t actually need to rent-to-own anything. If you really do need something, save up and buy it outright. That will save you the cost of the item one or two times over compared to rent to buy. You work too hard for your money to just give it away!