The Downside to Rent To Own Deals

Rent-to-own stores have been around for a long time.  In the 1980’s they were in the business of mainly renting furniture, appliances and electronics…not for ownership. They would later sell the used merchandise.  They changed their business model to rent for the purpose of owning, which is really similar to retail installment.  You pay a specific amount for a certain time frame.  These stores target those with poor, little or no credit.  As you can imagine, these guys have their pros and cons.

Advantages

No security deposit or down payment is collected.

No credit check is conducted.

Merchandise can be returned at any time.  If the consumer can’t pay, they can return it and not have to continue to make the payments.

Flexible payment schedule is available such as weekly, bi-weekly or monthly.  They have the convenience of low regular payments.

They can take the merchandise home immediately or have free delivery the same day, in most cases.

They will own it, after making all payments.

Repairs are free.

Disadvantages

Pay high mark-ups on the price of merchandise.  You can pay up to two to three times the retail price.

Hidden fees are in the fine print of the contract such as repossession fees, late payment fees and merchandise damage fees.

If you can’t pay, the merchandise is returned to the store and you lose all the money you paid.  In addition, you may have repossession and cancellation fees, etc.

Rent-to-own stores in 47 states don’t have to disclose the annual percentage rate (APR), because their contracts are subject to state instead of federal consumer protection laws. Therefore, consumers don’t know the rates and can’t comparison shop.

Most pay for approximately 17 weeks or four months and then stop paying. As a result, they have to return the merchandise and lose what they have already paid.  By this time frame, they have already paid for it based on retail prices.

Interest rate is 400 percent annually compared to 14 to 30 percent for a credit card. By the time you pay for the item, you have paid for it two or three times.

Free repairs do not equate to timely service.

Doesn’t help consumers establish credit.  Payment history is not reported to the credit reporting agencies, unless the account is turned over to a collection agency.  The collection agency can report this to the credit reporting agencies, which is considered negative on your credit report and to your credit score.

You pay several multiples too much for the item

Here is an example of how rent-to-own works.  You rent a 42-inch flat screen TV and pay $39.99 weekly for 78 weeks, which would be $3,119.  If you paid for it within “90 days or same as cash”, the price would be $1,560, compared to the retail price at other stores of $650.  If you made payments for 17 weeks, you would pay $680, which is more than the retail price.  The rent-to-own retail price is 2.4 times the retail price at other stores.  The total price after 78 weeks is 4.8 times the retail price at other stores.  Ouch!

Credit Damage Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.