Posted by Fletcher Accounting and Tax Service Inc.

Rent-To-Own and The Alternatives

Rent-To-Own and The Alternatives

Rent-to-own sounds like it too good to be real, right? For a small recurring amount, you can easily take an item from a store, with the intention of paying later.

In the event of a lease with an option to purchase, consumers have immediate access to new or used goods such as furniture or appliances and pay a weekly, semi-annual, or monthly payment instead. Most rental companies do not need a credit check or prepayment, and the rent has a predetermined duration, usually between 12 and 24 months. Best of all, customers can cancel at any time, and the item purchased on rent could be returned.

How much can you be prepared to pay for this instant gratification?

According to the Association of Progressive Lease Organizations, a non-profit trade association that defends the leasing industry is an $8.5 billion industry with approximately 9,200 stores in the United States. Canada and Mexico serve 4.8 million customers a year.

But Is It Worth It?

What you can rent with an option to buy can cost you

The rental industry is known to customers who pay double or triple what they would pay for an item by direct purchase in advance.

For example, one of the country's largest leasing companies, Rent-A-Center, recently offered a 50-inch Samsung smart TV for a weekly payment of $19.99 over 65 weeks, a total of 1299, 35 USD for the last payment period.

At the same time, Walmart offered the same TV for $397.99, about $900 less than a hire-purchase transaction. Save $16 every week for 25 weeks, and you'll have enough money to buy Walmart TV for free. (Of course, at the end of the 25 weeks, the price of television should have gone down, or at that point, it could save money and buy a more elegant TV).

A professor of finance at Massachusetts University in Dartmouth, says that the cost of leases, expressed as an annual percentage (APR), can be 200% or more. A study conducted by NerdWallet in 2017 found that annual Rent-A-Center rates ranged from 43% to 468%. This except New Jersey, where the current law imposes a 30% limit on the APR. Make a Comparison of that to the APR of a credit card, which averaged 14% in August 2018, according to the Federal Reserve.

The Federal Trade Commission (FTC) informs consumers of purchase and lease transactions because the laws that govern them differ from those of the state. Many leasing companies may charge shipping or handling fees in addition to local and national sales taxes.

An associate professor, who published an article on the issue of buying a teacher in the late 1990s from the University of Michigan, said that most consumers are wide open.

According to his study of low-income people living in Pittsburgh, Pennsylvania, people use it with a "meaningful understanding" of the amount of money that costs over time. But many of these people opt for rent with the opportunity to buy because they have financial problems of self-control. The external leasing structure allows you to "save" because, without it, you could not, he says.

"Like many low-income financial services, leasing sales simultaneously meet the specific needs of the population and exploit its economically viable status." 

APRO does not dispute that leasing with an option to purchase may be more expensive than buying an item directly. It's just an option for people who "have credit and credit restrictions."

Who Rent-To-Own Works For?

Traditionally, the property rental industry targets low-income people. More than two-thirds of leased customers have incomes below $36,000, according to APRO statistics.

On the surface, this attracts consumers who have no money to pay for an item in advance. It is also beneficial for persons who do not have access to credit to charge the item on a card now and fear that you will pay later. If customers feel they cannot pay for this item, they simply return it to the store without affecting their credit score.

For example, consider a single mother in a paid car-free job. If you have to wash your clothes, you have to take the bus to go to the laundry mart where you will spend between $15 and $20 a week to wash your clothes. With almost the same amount of money, she could rent a washer/dryer in the comfort of her home. If the device breaks down, most rental companies repair it for free or give a loan to the woman until it is fixed. My conclusion is that this is an expensive but valuable service. I can think of several situations where that's what you want to do.

Alternative

If lease-purchase does not suit you, consider the following solutions:

Layaway- Layaway is similar to the rent-to-own, except that the store keeps its object until full payment of the purchase price. With this arrangement, you will pay no interest in your purchase, and you probably will not have to go through a credit check. However, an upfront payment is required, for instance, Walmart pays 10% of the cost of the item, and many stores pay a service fee or penalty if you change your mind.

Fintech loans- Take a look at credit institutions such as Affirm and Update. With Affirm, users can buy household items from more than 1,000 merchants and have the option to pay with Affirm at the time of payment. After a regular credit check, Affirm offers a loan for the item, which can be paid for three, six, or 12 months. The update provides personal loans of $1,000 to $50,000 with annual percentage rates (APRs) ranging from 7.99% to 35.89%. The lender gives terms of about 36 or 60 months at a rate that does not increase.

Open a savings account- Book the same amount of money you pay to a leasing company every week or month, but store it in a savings account that earns interest. For example, Varo Online Banking does not offer minimal savings accounts with an APY of 2.12%.

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